Picking a good stock is the most fundamental thing in stock investing. There are thousands of stocks to choose in the stock market. While there are a lot of options and considerations that might be confused you, however investors usually put stocks into three different categories, size, style, and sector.
Size of the company refers to market capitalization, often called as market cap. Market capitalization determines how large a company is. The calculation of market capitalization is so simple; just multiply the current share price by the total number of shares outstanding. For example a company may have 1 billion shares outstanding a stock price of $20. So, the total market capitalization is $20 billion. Investors use the term large-cap, mid-cap, and small-cap to indicate a company size.
Large-cap stocks are the stocks of large corporation which worth over $10 billion. The mid-cap stocks are those of medium-sized corporation which worth between $2 billion and $10 billion. The small-cap or microcap stocks are those of small corporation which worth between $300 million and $2 billion. Some people prefer large-cap stocks to mid-cap or small-cap stocks because large corporation tend to be stable, safe, and rarely go to pitfalls.
Some others are likely to choose the small-cap stocks since the price tend to rise quickly. However, small-cap stocks often run into troubles as they grow. In fact, all corporations have the same chance to face some problems even a large and well-known corporation can go bankrupt.
Style of stocks can be categorized into, growth, value, and cyclical. Growth stocks are the stocks which is growing at an above-average rate compares to the rest of the market. It is a potential stock for the investors who want to get in early and get out as the stock reaches its peak. On the other hand, value stocks are the opposite of the growth stocks. It trades at a rate that is below the overall market. The stocks of the company maybe plummet to lower price, yet a value investor might think the business is still good regardless the plummeting stock price and hope the stock will recover its true worth.
Cyclical stocks are those whose depend on the economic situation to a great extent. Cyclical stock’s price will rise when the economy is good and fall when the economy is in a down turn. Investors of cyclical stocks have to guess when the next upturn or downturn is.
Sector is a type of business in which the companies operate. The Standard & Poor’s classifies all stock into ten sectors which include energy, technology, consumer staples, telecommunications, health care and financials. For the investors, it is important to determine the stock’s sector since there are always strong and weak sectors no matter what the market is doing. Everything related to computer and technology nowadays tends to rise quickly. However, some investors are more likely to invest in consumer staple sectors like food, beverages, pharmaceuticals, and household goods.