WHAT ARE DIFFERENT TYPES OF STOCKS?

Stocks on the basis of dividend payments: 

Dividends are the primary source of income until the shares are sold for a profit. Stocks can be classified on the basis of how much dividend the company pays.

Income stocks:

These are stocks that distribute a higher dividend in relation to their share price. They are also called dividend-yield or dog stocks. So, a higher dividend means larger income. This is why these stocks are also called income stocks.

 Income stocks usually represent stable companies that distribute consistent dividends. However, these companies often are not high-growth companies. As a result, the stock’s price may not rise much. Preferred stocks are also income stocks, since they promise regular dividend payments.

Income stocks are thus preferred by investors who are looking for a secondary source of income. They are relatively low-risk stocks.

Investors are not taxed for their dividend income. This is another reason that long-term, relatively low-risk investors prefer income stocks.
So how to find such stocks? Use the dividend-yield measure to identify stocks that pay high dividends. The dividend yield gives a measure of how much an investor is earning (per share) from the investment by way of total dividends. It is calculated by dividing the dividend announced by the share price, and then written in percentage format. For example, a stock with a price of Rs. 1000 offers a dividend of Rs. 5 per share has a dividend yield is 0.5%.

Growth stocks

 Not all stocks pay high dividends. This is because, companies prefer to reinvest their earnings for company operations. This usually helps the company grow at a faster rate. As a result, such stocks are often called growth stocks.

Since the company grows at a faster rate, the value of the shares also rises. This helps the investor earn a higher return when the stock is sold, although this comes at the expense of lower income through dividends.

For this reason, investors choose such stocks for their long-term growth potential, and not for a secondary source of income.

However, if the company ceases to grow, it cannot be called a growth stock. This makes such stocks more risky than income stocks.

Stocks on the basis of fundamentals:

Followers of value investing believe that a share price should equal the intrinsic value of the company’s share.

• If a share price exceeds this intrinsic value, the stock is believed to be overvalued. In contrast, if the price is lower than the intrinsic value, the stock is considered to be undervalued.

• Undervalued stocks are also called ‘value stocks’. They are preferred by value investors, as they believe the share price will eventually rise in the future.