Top Stock Companies for Investing in 2023 | Motilal Oswal

Top Stock Companies

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Understanding Stocks

Getting a better understanding of stocks will let you know how to incorporate them into your investing/trading strategy. You may already know that stock represents a share in a company which means ownership to the extent of that share. As such, if you are a shareholder, you are a partial owner of the company. Stocks are generally purchased online through different exchanges which make up the stock market.

What are the different types of stocks?

Once you know what stocks are, it’s worth knowing that there are different types of stocks. Stocks are classified according to a range of parameters such as market capitalisation, ownership, risk, location, sectors, and other variables. Here are the chief types explained:

According to Market Capitalisation

Three kinds of stock according to the market value of the total degree of shareholding exist.

  • Large-cap Stocks -
    These are stocks of large companies with a market capitalisation of Rs. 20,000 crore or more.
  • Mid-cap stocks -
    These are stocks of companies that have a market capitalisation of Rs. 5,000-20,000 crore
  • Small-cap stocks -
    These are stocks of companies that have a market capitalisation of Rs. 5,000 and below.

According to Ownership

The three types of stocks based on ownership include common stocks, preferred stocks and hybrid stocks.

  • Common Stocks -
    These stocks are usually held by most retail investors and pay dividends, give voting rights to shareholders, and in case companies go bankrupt, are the last in line to get liquidated or recuperated.
  • Preferred Stocks -
    Shareholders of these kinds of stocks are promised dividends, do not have voting rights, but are prioritised if the company goes bankrupt in terms of liquidity and recuperation of stock value.
  • Hybrid Stocks -
    These stocks give shareholders the option of being converted into a set amount of common stocks at a fixed time.

According to Risk

There are broadly two kinds of stock based on their risk profiles.

  • Blue chip Stocks -
    These comprise stocks of extremely large companies, well-established in the industry. These are companies which boast a high performance value and do well in the long term, as they have established reputations, and are stable with low liabilities. Additionally, stocks of such companies tend to pay dividends consistently.
  • Beta Stocks -
    Beta, rather than being a kind of stock, is a metric to measure risk in a stock’s profile, based on its volatility. If the beta score is high, the stock tends to be a risky bet.

According to Dividend Payment

Based on the dividends paid to shareholders, there are two kinds of stocks.

  • Income Stocks -
    These are stocks of stable companies which pay regular dividends. They tend to give out high returns in the long run and are called “dividend-yield” stocks.
  • Growth Stocks -
    These stocks belong to companies that prefer to reinvest their profits into the company with the aim of growing the company. These are considered riskier than income stocks, but shareholders gain returns out of capital appreciation.

According to Sectors

Stocks can be categorised according to the companies in different sectors that they belong to. For instance, common sectors are BFSI (banking, financial services and insurance), IT, Pharma, etc.

According to Location

Stocks which are classified according to “location” include domestic and foreign stocks. Domestic stocks include all those company stocks listed on Indian exchanges, while foreign stocks include those listed in exchanges outside India, and are of companies whose headquarters are overseas.

According to Price Trends

In terms of price trends, there are two types of stocks. These are cyclical stocks and defensive stocks. Cyclical stocks are those whose priced tend to fluctuate based on changes in economic trends (eg. airline stocks), while defensive stocks (eg. pharma stocks) do not fluctuate as much.

How does the stock market work?

The “stock market” is a broadly-used term encompassing a group of markets in which the regular purchase, sale, and issuance of shares/stocks with publicly held companies occur.

You could say that the “stock market” represents an umbrella term for such markets. Several individual stock exchanges make up the stock market. The most popular are stock exchanges in the United States: the NYSE or the New York Stock Exchange, and the Nasdaq. In India, well-known exchanges are the BSE or the Bombay Stock Exchange and the NSE or the National Stock Exchange. These exchanges, among various others, make up the stock markets in their respective countries.

Through stock markets, stocks are bought and sold via exchanges. While it is referred to as the “stock market”, or the “equity market”, there are other financial instruments like commodities, bonds, derivatives, and currencies that are traded/transacted on the stock market too.

How do you buy stocks?

Typically, stocks are purchased and sold on stock exchanges, like the Bombay Stock Exchange or the New York Stock Exchange. When a company goes public through an IPO or Initial public offering, its stock is available for investors to buy or sell on the exchange. Usually, investors use a brokerage or trading account to buy stock on an exchange. The exchange lists the buying price (the bid price) or the selling price (the offer price). Furthermore, the stock price is influenced by factors like supply and demand in the market, besides other key variables.

Is it risky to own stocks?

All investments, whether stocks or any other, have some degree of risk. Stocks, mutual funds, exchange-traded funds and bonds can face a loss in value in the event of market conditions declining. When you invest, choices are made about what has to be done with your capital. Consequently, the value of your investment might go up or down due to corporate decisions or market conditions.

Historically, data has displayed that stocks have outperformed the majority of other investments in the long term.

What is the difference between stocks and bonds?

To raise capital to grow the business or for other reasons, companies issue stocks. Important distinctions exist between whether an individual buys shares/stocks directly from a company issuing them in the primary market, or from some other shareholder in a secondary market. A company that issues shares does so in exchange for capital.

Bonds differ from stocks in many ways. Bondholders are technically creditors to the company and are entitled to the interest and repayment of any principal invested in a corporation. Creditors get legal priority over and above other stakeholders in case of bankruptcy of the company and will be compensated first when a company has to sell its assets.

In contrast, shareholders receive nothing in the event of bankruptcy. This implies that stocks pose an inherent risk in investment than bonds do.

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