Stocks are usually classified according to their characteristics. Some are classified according to their growth potential in the long run and the others as per their current valuations. Similarly, stocks can also be classified according to their market capitalization. The following is a broad classification of the stocks. The classifications are not rigid and no rules are laid down anywhere for their classification. The classifications are the ones, which are widely used and accepted.
Classification according to Growth and Value:
- Growth Stocks: Growth stocks are stocks that would offer high returns in the long run. Usually, these are companies that might be medium to large in size and might have invested in capacity expansion or new ventures, which would give returns in future. Hence the investor would have to wait to get returns. However, the returns from these stocks can be very high depending on the success of the new capacity or new project.
- Value Stocks: Value stocks are stocks, which are currently undervalued due to down side pull by overall market weakness or for other reasons. The value stocks might be currently undervalued but the company fundamentals tend to be intact and there are usually no changes in the profitability or business model of the company. These stocks, due to their current and temporary under valuation represent opportunities. Investors, who can identify such stocks, can invest in them with minimum risk and get decent returns once the stock price moves up either because of overall market improvement or because of regained buying interest in that stock.
Classification according to Large, Mid and Small:
- Large Cap Stocks: Large Cap Stocks are stocks whose market capitalization is large. Usually these are companies, which have established business models and have grown big over the years. These companies have stable business models and thus pose lesser risk to the investors. Due to their less risk and stability in the business model, many investors invest in such companies, The demand for such stocks is high and hence they have high liquidity.
- Mid Cap Stocks: Mid Cap Stocks are stocks whose market capitalization is medium. These are medium sized companies probably ancillaries to the large cap companies or regional companies having few products catering to fewer markets. These companies might or might not have established business models. However, due to their small size models, they carry more risk than large cap companies. The liquidity is less compared to the large cap companies.
- Small Cap Stocks: Small Cap Stocks are stocks whose market capitalization is small. These are small regional or local companies catering to either mid or large companies. Mostly, the business of these companies depends on the business of the mid and large cap companies. This makes them small ancillaries and due to full or partial dependence on mid and large sized companies, the risk is high, The demand for such stocks is low and hence the liquidity is low.