|
Investment Strategies
Categories
- Value Investing
-
Growth Investing
|- Income Investing
- Market Capitalization
-
Momentum Investing
-
Technical Investing
-
Buy and Hold Strategy
- Buy What You Know
-
Contrarian Investing
-
Turnaround Investing
-
Tobin’s Q
-
Responsible Investing
- ADR's
-
Global Investing
-
The Dow Theory
-
Odd-Lot Theory
-
Election Cycle Theory
-
Dow Dividend Theory
-
Penny Stocks
-
Initial Public Offerings
-
Dollar Cost Averaging
-
Drips
- Risk Tolerance
|
|
Market Capitalization – Company Size
Investing
Dividing the universe of stocks by market
capitalization or company size is an approach that investors and writers
have used over the years. There is no standard cut off classification
distinguishing between large and small companies. Currently, most investors
use market capitalization rankings to define size, rather than sales and
profit rankings. I will therefore be discussing market capitalization in
this section.
Market capitalization represents the amount of shares
the company has outstanding, multiplied by its share price. This ranking
system measures the market value of companies, not their sales and profits.
In many instances, there is no correlation between market value and profits.
The broad categories of market capitalization are
Large Cap, Mid Cap and Small Cap. Additionally, in each category there are
value and growth stocks and companies in-between. Generally, large companies
are more stable than small companies. The gradual switch from sales and
profit rankings towards market capitalization rankings, was also a shift
away from the fundamentals towards more speculative investments. Discussed
below are the categories:
Large Cap. – The global business
institutions of the world; Fortune 500 or Forbes 500 type companies. They
also include many of the popular growth companies that have promising
prospects. These organizations dominate their markets. The large cap
companies normally grow with the economy and enhance their stature through
acquisitions. They usually derive a substantial part of their business from
international operations, which may mitigate the risk of a devaluing U.S.
dollar. Market capitalization for such companies is typically in the $10
billion plus range.
Mid Cap. – The Russell 2000 type
companies, or many of the companies found in Value Line that are not in the
Fortune few hundred. Many of the companies are household names, have
excellent brands and products, and usually can grow faster than the general
economy. They have already made the switch from a smaller company
environment to a professionally managed organization. Many are international
in scope and financially strong, with professional management, corporate
governance procedures and internal audit departments. Mid cap companies have
established strategic planning, marketing, finance, accounting, production,
human resources and information technology departments. These stocks are
traded on the major exchanges; they normally grow faster than the large cap
stocks, but they also carry more risk. Capitalization ranges from $2 billion
to $10 billion.
Small Cap. –
Capitalization is less than $2 billion, and may also include larger
companies that ran into financial difficulties. They usually have a niche
product, don’t have deep pools of management talent, and don’t pay
dividends. Many have no research analyst following them, and are ignored by
the large funds. Many would be unable to survive a market or business
downturn. On the positive side, there are many reasonably priced, quality
growth and value small cap stocks, which you can make money on. Because of
the extra risk, you can normally find reasonably priced small cap companies
at a P/E discount in comparison with their large cap peers. Historically,
small cap companies in the aggregate have out-performed the large cap
companies. The “January effect” is also worth noting; small cap companies
that decline at year-end due to tax selling, often slightly rebound in
January.
In summary, the capitalization dollar ranges are
subjective and fluctuate with the market. Depending upon how you slice the
universe of stocks and the time periods you use, performance statistics will
be different. Once again, while larger companies are normally financially
stronger, better-managed, and less risky than smaller ones, each needs to be
evaluated individually.
Regarding investing ideas for young adults, normally
young investors view the secure, slow growth, large cap companies as their
fathers’ stocks, which they shy away from. These companies take time to
acquire a taste for. Often, however, youth gravitates, to their detriment,
towards the risky, unproven, start-ups and small cap companies. There is,
however, a solution to the generation gap. Focus on the mid cap stocks.
These are typically not your father’s or grandfather’s stocks, yet they are
usually somewhat secure and can offer exciting returns.
|
|
