1.

Types of Stocks Based on Market Capitalisation

Market capitalisation, or “market cap,” is a way to classify stocks by the total value of a company’s outstanding

shares. Here’s a clearer look at the different types:

 These are the biggest 100 companies by market value.

 They are well-established, often with stable revenue and profit. This makes them less risky.
Large-
cap  Shares are generally more expensive because of their size and reputation.
Stocks

 These are medium-sized companies by market value, ranked 101-250.

 They often grow faster than large-cap companies, offering higher returns.
Mid-
cap  They are more affected by economic changes and industry trends, making them somewhat less predictable.
Stocks

 These are smaller, less valuable companies.

 Prices can fluctuate significantly due to their size and lower liquidity.
Small-
cap  They can offer substantial gains but come with higher risk.
Stocks

2. Types of Stocks Based on Ownership

Stocks can be classified based on their rights and privileges, which dictate the level of influence and benefits that

shareholders receive. This classification impacts factors such as dividend payments, voting rights, and the priority of

claims in case the company faces liquidation.

 Shareholders can receive a share of the company’s profits through dividends.

 These are the most common types of stock.

Common  Typically, common stockholders have voting rights in company decisions.

Stock
Preferred
Stock  Preferred stockholders receive fixed dividends before common stockholders.
  In case of liquidation, preferred stockholders get paid before common stockholders.

 Usually, preferred stockholders do not have voting rights.

 These stocks have characteristics of both common and preferred stocks.

Hybrid  This type allows investors to convert bonds into equity or debt.
Stocks

 Issued as preference shares that can be converted into a set number of common shares at a specific time.
Convertibl
e
Preference  The company may choose to grant optional voting rights.
Shares

 The company can buy back its stocks at a predetermined price or time.

 Investors can sell their stocks back to the company at a specific price or time.
Stocks with
Embedded
Derivative  These options are not commonly issued.
Options

3. Types of Stocks Based on Fundamentals

Investors often evaluate a company’s financial health before purchasing its stock, despite the fact that market prices

are influenced by supply and demand.

 These stocks are priced higher than their intrinsic value.

Overvalued  The current market price is not justified by the company’s earnings outlook.
Stocks

 These stocks are priced lower than their intrinsic value.

 These stocks have the potential for price increase as they reflect strong fundamentals not yet recognised by the

Undervalued market.
Stocks

4. Types of Stocks Based on Price Volatility

Stocks can be classified based on how much their prices fluctuate. Understanding this can help investors choose

stocks that match their risk tolerance.

 The beta coefficient is a statistical measure used to assess how much a stock’s price moves in relation to the market.

 If a stock has a high beta, it means the stock is more volatile. For example, if the market goes up or down by 1%, a

Beta high beta stock might go up or down by 2% or more. This implies higher risk but also the potential for higher returns.
Stocks

 These are stocks of large, well-established, and financially sound companies that have been operating for many years.

Examples include companies like Reliance Industries and Infosys.

 Blue-chip stocks are known for their stable performance and consistent returns over the long term. They tend to be less

volatile compared to beta stocks, making them a safer investment option for those who prefer steady growth and lower
Blue-
chip risk.
Stocks

5. Types of Stocks Based on Economic Trends

Stocks respond differently to changes in the economy. They can be categorised based on their reaction to economic

trends.

 These stocks are highly sensitive to economic changes. When the economy is doing well, their prices tend to rise

Cyclical significantly. Conversely, during economic downturns, their prices can drop sharply.
Stocks

 Defensive stocks are less affected by economic changes. Their prices tend to remain stable regardless of whether

the economy is booming or in a recession.

Defensiv  Considered safer investments due to their stability during economic fluctuations.
e Stocks

Types of Stock Valuation

Stock valuation methods can be primarily categorized into two main types: absolute and relative.

Absolute
Absolute, or intrinsic, stock valuation relies on the company’s fundamental information. The method generally
involves the analysis of various financial information that can be found in, or derived from, a company’s financial
statements. Many techniques of absolute stock valuation primarily investigate the company’s cash flows, dividends,
and growth rates. Notable absolute common stock valuation techniques include the dividend discount model
(DDM) and the discounted cash flow model (DCF).

Relative

Relative stock valuation compares the potential investment to similar companies. The relative stock valuation
method calculates multiples of similar companies and compares that valuation to the current value of the target
company. The best example of relative stock valuation is comparable company analysis, sometimes called trading
comps.

How to Value a Stock

Valuing stocks is a process that can be generally viewed as a combination of both art and science. Investors may be
overwhelmed by the amount of available information that can be potentially used in valuing stocks (company’s
financials, newspapers, economic reports, stock reports, etc.).

Therefore, an investor needs to be able to filter the relevant information from the unnecessary noise. Additionally,
an investor should know about common stock valuation techniques and the scenarios in which such methods are
applicable:

Dividend discount model (DDM)

The dividend discount model is one of the most basic techniques of absolute stock valuation. The DDM is based on
the assumption that the company’s dividends represent the company’s cash flows to its shareholders.

Essentially, the model states that the intrinsic value of the company’s stock price equals the present value of the
company’s future dividends. Note that the dividend discount model is applicable only if a company distributes
dividends regularly and the distribution is predictable.

Discounted cash flow model (DCF)

The discounted cash flow model is another popular method of absolute stock valuation. Under the DCF approach,
the intrinsic value of a stock is calculated by discounting the company’s free cash flows to its present value.

The main advantage of the DCF model is that it does not require any assumptions regarding the distribution of
dividends. Thus, it is suitable for companies with unknown or unpredictable dividend distributions. However, the
DCF model is more sophisticated from a technical perspective.

Comparable companies analysis

Comparable companies analysis is an example of relative stock valuation. Instead of determining the intrinsic value
of a stock using the company’s fundamentals, the comparable approach aims to derive a stock’s theoretical price
using the price multiples of similar companies.

The most commonly used multiples include the price-to-earnings (P/E), and enterprise value-to-EBITDA
(EV/EBITDA) multiples. The comparable companies analysis method is one of the simplest from a technical
perspective. However, the most challenging part is the determination of truly comparable companies.
 The PE multiple, or Price-to-Earnings Ratio, is a valuation metric that compares a company's stock price to its
earnings per share (EPS). It helps investors determine if a stock is potentially overvalued or undervalued relative to
its earnings. Essentially, it indicates how much investors are willing to pay for each dollar of a company's earnings.
Key Concepts:
 Formula:
P/E Ratio = Stock Price / Earnings Per Share (EPS).
 Interpretation:
 High P/E: May suggest the stock is overvalued, as investors are paying a higher price for each dollar of earnings,
often indicating expectations of strong future growth.
 Low P/E: May suggest the stock is undervalued, as investors are paying a lower price for each dollar of earnings,
potentially indicating lower growth expectations or a less favorable outlook.

If market price is 100 and p/e ratio is 10 and eps is 9 then it means that the intrinsic value is 90 and when we
compare it with market price which is 100 means that stock is overvalues as Intrinsic value is less than market
price. Same way if market price is 100 and p/e ratio is 10 and eps is 11 then it means that the intrinsic value is 110
and when we compare it with market price which is 100 means that stock is undervalued.

Basics of Bond

Before learning about the different types of Bonds. It is important that a candidate knows what are Bonds. So
starting with the basics of a bond, let us first answer a few basic questions based on bonds.

 What is a Bond?

By Definition, “A Bond is a fixed income instrument that represents a loan made by an investor to a borrower.” In
simpler words, bond acts as a contract between the investor and the borrower. Mostly companies and government
issue bonds and investors buy those bonds as a savings and security option.

These bonds have a maturity date and when once that is attained, the issuing company needs to pay back the amount
to the investor along with a part of the profit. This kind of dealing with bonds between the issuer and the investor is
done by brokers.

Different Types of Bonds

There are various types of Bonds. A few of them have been discussed below in brief.

 Traditional Bond: A bond in which the entire principal can be withdrawn at a single time after the bond’s
maturity date is over is called a Traditional Bond.
 Callable Bond: When the issuer of the bond calls out his right to redeem the bond even before it reaches
its maturity is called a Callable Bond. Through this type of bonds, the issuer can convert a high debt bond
into a low debt bond.
 Fixed-Rate Bonds: When the coupon rate remains the same through the course of the investment, it is
called Fixed-rate bonds.
  Floating Rate Bonds: When the coupon rate keeps fluctuating during the course of an investment, it is
called a floating rate bond.
 Puttable Bond: When the investor decides to sell their bond and get their money back before the maturity
date, such type of bond is called a Puttable bond.
 Mortgage Bond: The bonds which are backed up by the real estate companies and equipment are called
mortgage bonds.
 Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable to repay the principal
amount to the investor, such type of bonds are called zero-coupon bonds.
 Serial Bond: When the issuer continues to pay back the loan amount to the investor every year in small
instalments to reduce the final debt, such type of bond is called a Serial Bond.
 Extendable Bonds: The bonds which allow the Investor to extend the maturity period of the bond are
called Extendable Bonds.
 Climate Bonds: Climate Bonds are issued by any government to raise funds when the country concerned
faces any adverse changes in climatic conditions.
 War Bonds: War Bonds are issued by any government to raise funds in cases of war.
 Inflation-Linked Bonds: Bonds linked to inflation are called inflation linked bonds. The interest rate of
Inflation linked bonds is generally lower than fixed rate bonds

Understanding Interest Rate Risk

Interest rate changes can affect many investments, but it impacts the value of bonds and other fixed-income
securities most directly. Bondholders, therefore, carefully monitor interest rates and make decisions based on how
interest rates are perceived to change over time.

For fixed-income securities, as interest rates rise security prices fall (and vice versa). This is because when interest
rates increase, the opportunity cost of holding those bonds increases – that is, the cost of missing out on an even
better investment is greater. The rates earned on bonds therefore have less appeal as rates rise, so if a bond paying
a fixed rate of 5% is trading at its par value of $1,000 when prevailing interest rates are also at 5%, it becomes far
less attractive to earn that same 5% when rates elsewhere start to rise to say 6% or 7%.

In order to compensate for this economic disadvantage in the market, the value of these bonds must fall, because
who will want to own a 5% interest rate when they can get 7% with some different bond.

Therefore, for bonds that have a fixed rate, when interest rates rise to a point above that fixed level, investors
switch to investments that reflect the higher interest rate. Securities that were issued before the interest rate change
can compete with new issues only by dropping their prices.

Interest rate risk can be managed through hedging or diversification strategies that reduce a portfolio's effective
duration or negate the effect of rate changes. (For more on this, seeManaging interest rate risk.)

Example of Interest Rate Risk

For example, say an investor buys a five-year, $500 bond with a 3% coupon. Then, interest rates rise to 4%. The
investor will have trouble selling the bond when newer bond offerings with more attractive rates enter the market.
The lower demand also triggers lower prices on the secondary market. The market value of the bond may drop
below its original purchase price.

The reverse is also true. A bond yielding a 5% return holds more value if interest rates decrease below this level
since the bondholder receives a favorable fixed rate of return relative to the market.

Bond Price Sensitivity

The value of existing fixed-income securities with different maturity dates declines by varying degrees when
market interest rates rise. This phenomenon is referred to as “price sensitivity” and is measured by the bond's
duration.

For instance, suppose there are two fixed-income securities, one that matures in one year and another that matures
in 10 years. When market interest rates rise, the owner of the one-year security can reinvest in a higher-rate
security after hanging onto the bond with a lower return for only one year at most. But the owner of the 10-year
security is stuck with a lower rate for nine more years.

That justifies a lower price value for the longer-term security. The longer a security's time to maturity, the more its
price declines relative to a given increase in interest rates.

Note that this price sensitivity occurs at a decreasing rate. A 10-year bond is significantly more sensitive than a
one-year bond but a 20-year bond is only slightly less sensitive than a 30-year one.