Basic Stock Classifications:
Types of Stock
Thus far, we know that an individual stock is essentially a share of ownership in the underlying company. However, as we saw previously when discussing Mutual Funds, that there are various types of equity mutual funds that seem to designate various types of stock. A thorough knowledge of these various classifications and their defining factors will help you in choosing one appropriate for your portfolio. They are all unique enough that the performance in any one can vary greatly when compared to another.
Though the number of stock classification is large and can be daunting to the new investor, most will fall into one of four basic categories. For the purposes of our review we will focus on each of those categories and give relevant examples of a stock falling into that category.
Capitalization Level -- Capitalization level is probably the most common level of differentiation among individual stocks. Capitalization is basically the total dollar value of all outstanding shares of stock for a particular company. Though there are various divisions depending on who you ask, most agree at the very least in three basic types which are as follows:
Large Cap -- These stocks are usually some of the larger, well-known companies, which you have probably heard of, and typically they have a capitalization of $5 Billion dollars or more. Keep in mind this can vary and some investment houses or brokers might use a higher limit to define a large cap stock.
Mid Cap -- A middle capitalization stock is usually a company that has been established for a decent amount of time and as such it will be known by a fair number of people. The capitalization for a mid cap will fall between $1 Billion - $5 Billion dollars in most cases, but again this can vary depending on the company or the broker.
Small Cap -- The small cap stocks are for the most part companies most are unfamiliar with and they are usually not followed to a great extend by analysts or individual investors. Small Caps typically have a capitalization of less than $1 Billion dollars.
Segment -- Segment is another area of classification and this one in particular is popular with the individual investor. Sometimes, to their detriment. There are a few variations on the definition of segment but in most cases it refers to industry. Because the financial aspects and situational variables vary greatly between the various industries the stocks of a particular industry will tend to behave quite differently compared to a stock of another industry. Pharmaceuticals, utilities and technology are popular choices or unpopular choices depending on the climate and the prevailing market sentiment. It is not unusual to see investors driving up the prices of a particular segment regardless of the individual stock. Needless to say, it is important to know the particulars of a stock at a deeper level than just knowing its segment.
Geography -- Geography is another classification that sees boom and bust periods depending on the market climate. The past twenty years has seen market rallies around Latin America, Asia and Eastern Block companies. Typically what happens is that a well-regarded analyst comments on the incredible potential of a particular part of the world and then shortly thereafter other analyst and brokers follow suite with the subsequent result being a large upswing in prices, which may or may not be justified by actual profit. However, it is a fact that a geographic segment can vary greatly in terms of market performance when compared to another segment. Thus, there is certainly merit in exploring stocks with geographic diversity. However, as always the risk will sometimes be higher and should be noted before investing.
Situational -- The last category of classification is more or less a catch all that can apply to many other "types" of stock which are frequently encountered in the investment world. Some of these deserve discussion on their own merit and others are relatively vague in their classification as compared to other stocks. A cursory definition of a few that come to mind follows:
Blue Chip -- The "Blue Chip" stock is probably one of the most frequent classifications the average investor will encounter. Though, the true definition of a blue chip depends more on the person defining it, typically it refers to a company with a well established reputation that has a long record of financial stability. Dividend payout is often an important aspect of this criterion. More than anything the term applies to quality and reputation as defined by the company and/or broker making the recommendation. Suffice is to say it is easier to say what a blue chip is not than what it is, since whether a company is a blue chip is often debatable.
Value Stocks -- The term "value stock" usually refers to a stock that is undervalued in terms of its trading price v. book value. Typically, such a stock has been sold off by many investors for one reason or another (litigation, product issues, marketing, virtually anything can apply) and as a result the stock has dropped in price. However, the book value of the stock based on tangible assets and market share will reflect a higher value than the current trading price. Thus, the stock is considered a "value stock".
Income Stocks -- Income stocks are very popular with retirees or other investors seeking to maximize income through dividend payout. Utilities are probably the most popular type of income stock and as a whole they have a very reliable track record of paying out dividends on a regular basis. Other companies or segments may also pay out dividends regularly and they too would fall into this classification.
Growth Stocks -- A growth stock is usually defined as a company with incredible growth potential because of market, product, segment or situation. Examples would be a company that manufactures some special pharmaceutical exclusively that is necessary to fight an emerging disease. Obviously the growth potential for that company is enhanced by this situation.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.