Stocks by Size, Style, and Sector – What Types are There?
Watch any financial program on TV or read any financial news on the internet and you will hear terms like small cap, large cap, growth stocks and value stocks. Dig deeper and you’ll hear commentators and financial writers talking about the different sectors a stock can fall into. Understanding these principles is important for anyone looking to trade stocks.
How do financial experts calculate the size of a company? In technical terms the size of a company is called its market capitalization, and is calculated using a simple formula of multiplying the current share price by the number of shares currently outstanding. For example a company with a current share price of $7.89 that has 450,000 shares outstanding will have a market capitalization of $3,550,500.
A company with such a small market capitalization, like the one in our example, is referred to as a small-cap company. Companies that have a large market capitalization are called large-cap companies. Small-cap companies are often younger, less established companies but tend to offer a greater potential for growth than large-cap companies.
Stocks can come in a variety of styles; growth, value, and cyclical. Growth stocks are any stock that is growing at an above average rate compared to the rest of the market. Growth stock hold tremendous potential for investors who can get in early and get out as the stock approaches its peak.
Value stocks on the other hand are stocks that are growing at a rate that is below the market average. The term value here refers to the idea that the stock has more actual value than is reflected in its current stock price. Investors may pick up value stocks with the hope the stock will recover its true value, and thus realize a profit.
Cyclical stocks are those stocks whose value is heavily dependent on the economy at large. A cyclical stock’s value will rise when the economy is good and will fall when the economy is in a down turn.
The sector of a stock is really nothing more than the Standard & Poor’s high-level classification of a stock. S&P divides all stocks into ten sectors, and within each sector they further divide the stock into one of a large number of industries. For example health care and technology are both important sectors.