Share/Stock
I have already explained what is a Security. Now, let us discuss in detail about the Share or Stock of a company.
Officially, in financial terms, a Share is defined as a part of the ownership of a company or any financial asset. A company may decide to raise the required capital by selling the shares to investors. The buyers or investors then become equity shareholders in the business. The shareholders have the prospect of receiving dividends in return depending on the profits made by the company and the percentage of earnings paid as dividends.
There are various types of shares such as Equity shares, Preference shares, Right shares, Bonus shares, Sweat Equity shares, and Employee Stock Options Plans. Let us stick to Equity Shares in the article.
Common Shares or Equity Shares come under the category of securities and are traded on major stock exchanges. If invested wisely, the shares are one of the best long-term investments easily outperforming property, corporate bonds, government bonds, commercial papers, and other types of assets.
Usually, the terms ‘Stocks’ and ‘Shares’ are used interchangeably. The ‘Stocks’ are referred to as shares of a general asset class, while ‘Shares’ are concerning the issue of a specific company or business firm. The purchaser or investor of the shares can either benefit from the gains if the issuer company performs well and also has to bear the losses when the company is in tough financial or under depressing economic conditions.
As we have already discussed, the shares are traded (bought and sold) in a stockmarket. There are two ways in which a shareholder could benefit from holding the shares. The first and more organized way is through the payment of dividends by the company. Another means is by capital appreciation, i.e. the increase in the price of the share in stock markets.
There are five important types of common stock or equity shares. They are Blue Chip Stocks, Income Stocks, Growth Stocks, Defensive Stocks, and Cyclical Stocks.
Blue Chip Stocks:
Blue Chips Stocks are issued by large and well-established companies with strong fundamentals. These are the best choice for new investors who have just started their investing career. As the companies are usually titans of the industry, their shares have good value and safety.
These stocks are traded at a high premium, and therefore, the returns through capital appreciation are low compared to other types of stocks. Make sure to find the right price before buying and also diversify into a variety of stocks. RIL, TCS, HUL, SBI, HDFC are examples of the blue-chip stocks.
Income Stocks or Dividend Stocks:
Some companies pay a considerable amount as a dividend on their shares. These stocks are called Income stocks. In India, some income stocks pay around 10% or more as dividends to their shareholders. It also depends on the price you buy the shares. Purchased at an ideal price, these stocks provide unparalleled income through dividends.
Some companies issue additional shares instead of cash to the investors as dividends. Nowadays, the shares of large corporate companies are trading at very high prices. The possibility of finding income or dividend stocks from corporate companies is very difficult. Although PSUs provide reasonable dividend yield, because of the inconsistent earnings, investors are not attracted to PSUs.
Do you know that investors who had purchased the TCS shares in January 2009 for 120/- and held onto those shares till now would be enjoying a healthy dividend of 18%?
Growth Stocks:
These are the shares of companies that are in an aggressive growth phase with increasing earnings every year continuously. Because of increasing earnings, these stocks are priced higher. People invest in these stocks only based on the performance for the last few years or even months.
The only anticipation is that stock price is going to increase in the future as well. Mostly, these stocks are highly-priced and do not provide any dividend. Companies use their retained earnings for the further expansion. It is better to stay away from such stocks because if the fundamentals and financial strength of the companies are average. You shall invest in growth stocks only if the issuer company has excellent fundamentals and business prospects.
Defensive Stocks:
A Defensive stock is the stock of a company with stable earnings regardless of the performance of the overall market. Some of these stocks also provide appreciable dividends. Companies with consistent demand for their products like utilities such as gas, electricity, consumer staples like food, and healthcare products come under defensive stocks.
Defensive stocks remain stable during the different phases of the business cycle. Simply put, the defense stocks are protected against market volatility because their products find demand even under the economic slowdown.
Cyclical Stocks:
A Cyclical stock refers to the shares whose price is affected by macroeconomic and systematic changes in the overall economy. Mostly, cyclical stocks follow the cycles of an economy like good economic growth or slowdown in the economy. Cyclical stocks are the exact opposites of Defensive stocks.
Normally, the issuer companies are related to customer discretion products and businesses that blossom in a booming economy. Therefore, the prices of these stocks rise during positive macroeconomic and industrial conditions and fall sharply in poor economic conditions when the demand for the products falls.
Automobiles, Cement, Steel, Apparel, etc come under Cyclical products.
Disclaimer:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID or Contact Form.
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