Classification of Stocks

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Stock picking is one of the most crucial things an investor will have to make for himself. Every investor is different because every investor has a goal set on their own. The rate of return and the risk associated for each are taken into consideration, as well as external factors that will, directly and indirectly, affect the stock's plight. Some investors would not wander away from their own level of expertise in a certain field. A famous example is Warren Buffet who does not invest in technology simply because he does not understand enough it.

With that in mind, one of the most important aspects of investing is choosing the right stock. When choosing, it's important to know what category they belong to as this will eventually have bearing on the price and their price movement.

There are a lot of ways to do this and one way is by looking at the size of the listed company or its market capitalization.

Market capitalization is the peso value of a company which is derived by multiplying the number of shares outstanding with the current market price.

Based on these numbers, a company can be categorized as large cap, mid cap or small cap. You can then automatically conclude that the expensive blue chips are classified as large cap companies. Small caps, for example, are usually valued at around 2 billion pesos and below.

Large cap companies tend to be less vulnerable to the ups and downs of the economy while small-cap companies tend to be the opposite. They may be more volatile and sensitive to turmoil but they have the advantage of providing for more growth versus large caps.

Another way of classifying stocks is to their sector and industry. The sector is just a broader scope of the term, or a larger part of the economy, while an industry is more specific. For example, under the financial sector is the banking industry. That industry will frequently increase or decline together and among them, one or two will move faster than the rest. Every industry has its own leaders and laggards.

One more example is with higher gas prices, transportation companies' profits would fall, directly affecting the stock price as well.

While a lot of financial experts would have something to say about the right mix in a person's portfolio, a number of them agreed that owning stocks at different sectors will help diversify the risk. Some investors would go as far as owning stocks at different companies that are inversely related to each other.

An additional way of differentiating stocks from one another is how they make their profits. They can either be secular or cyclical. Secular are sectors that people need and will continue to use even in a weak economy, while cyclicals are sectors that boom and bust with it. Examples of secular sectors are healthcare and consumer staples while an example of cyclical is luxury goods.

The bottom line is, as most fundamentalists will agree, a stock's description and category will inevitably affect the price. Research on the stock you plan to own and get to know the details that will contribute to its performance. This will give you an edge over what to do with its behavior, and if it is moving or not moving according to how it should.

by: Ms. Kristine Rodriguez

 

image credit: http://www.bloomberg.com/bw/articles/2013-08-29/explaining-the-pain-in-emerging-markets


 

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