Thu Aug 16, 2018 10:50pm EST
Finance Attitude - Understanding the 3 Basic Stock Subclasses
Finance Attitude - Understanding the 3 Basic Stock Subclasses

Different Stock experts and traders have grouped stocks into classes and subclasses. The main class is the ordinary and the preferential shares. All publicly traded companies issue common or ordinary stock and some companies also issue preferred stock which is less risky but has lower returns. The subclasses are many and each has its own characteristics and is subject to specific external demands that affect the stock performance at any given time. The stocks are described based on the behavior that is subject to a variety of factors. Here are the 3 basic sub-classes of stocks:

1.    Market Capitalization
Market cap is one measure of a company’s size and you will often find companies referred to a mega cap, large cap, mid cap or small cap. Market Cap is the short form of market capitalization. The capitalization of a company is the dollar value of the company that is calculated by multiplying the outstanding shares by the current market price. The large-cap companies tend to be less prone to the economic fluctuations than the smaller ones and they have larger financial reserves and can, therefore, absorb losses more easily and bounce back more quickly. This is however not a guarantee that larger companies cannot fall because even the most venerable company can collapse. The smaller companies, on the other hand, have greater potential for fast growth during the economic boom.

2.    Industry and Sector
Company stocks can derive their depiction from the industry or the sector that they fall in. A sector is a large division of the economy such as the financial or the banking sector, agricultural sector, utility sector among others. There are events in the economy that can have an impact on the entire sector. An industry can be affected y the technology and innovation and become pretty popular with investors. Other times the sector can be affected by an event that it does not appeal any investor. Sectors go through cycles where they really perform well at a given time and disappoint t a different time. To create and maintain a strong stock portfolio, you need to evaluate the sectors and industries to invest in at any given time. Then evaluate the individual companies within a sector that you have chosen.

3.    Growth and Value
When you want to decide on a stock, you focus on the growth and value aspect of the company issuing the stock. Growth stocks are issued by the companies that are expanding either rapidly or gradually over a longer period of time. Typically, these include new industries or older industries that are poised for expansion due to factors such as technological advancement, strategy shifts, acquisitions, new market etc. In most cases, the growth companies issue their stocks at a higher price than the current profits seem to warrant because most investors tend to focus on the future earnings. Growth stocks are however very volatile since these companies tend to take big risks to expand and to fulfill the investors’ expectations. Most growth stocks do not give dividend payments to the investors as the company managers reinvest the gains directly back into the company. Value investors, on the other hand, are solid investments that sell at what seems as low prices based on their history and market share. You can buy a value stock if you believe that it’s worth more than its current price. You need to have a considerable experience and strong tolerance for risk to invest in value stocks.

There are other stock subclasses like the defensive and cyclical stocks. It is wise to research on the different categories so as to make an informed decision before you invest.