Stock Categories

The universe of stocks can be divided in many ways: big or small, foreign or domestic, growth or value, and sector of the economy. Why are these categories useful in building portfolios, seeking diversification, or plotting strategy? Because a certain type of stock will often react or perform differently—or similarly—when compared to another type. It is therefore worthwhile to understand these categorizations and their characteristics.

Company size: market capitalization. Company size is measured by the market capitalization (market cap) of the company. Market cap is simply the total dollar value of the stock in the company—so, the number of shares outstanding multiplied by the market price. There are large caps, followed by mid-caps, then small caps and micro caps. While there are no official lines dividing these groups, large caps are generally considered to be over $5 billion, mid-caps between $5 billion and $2 billion, small caps under $2 billion, and micro-caps under $250 million.

Company style: growth or value. Company style generally refers to growth stocks versus value stocks. This is a simple concept, but the definitions can be vague. At their simplest, growth stocks are stocks that have grown—and are expected to continue growing—their earnings rapidly. And value stocks are those that are trading at historically cheap levels when compared to their expected earnings power. At the center of this notion is what’s called the price-earnings ratio (PE ratio), which is the ratio of the price of the stock to the earnings of the stock. A PE ratio can be calculated using the company’s previous earnings (usually the trailing 12 months), or using a forecast of future earnings. Value investors tend to look for companies with low PE ratios, while growth investors often don’t care about the PE ratio at all, focusing instead on the earnings growth potential. And while it isn’t always true, growth stocks tend to be more volatile, and value stocks less so.

Geography: developed vs. emerging. In the US, domestic stocks are the stocks of companies that are thought of as being American. It means their stock is listed on a US exchange, the company headquarters and operations are in the United States, and they are probably incorporated in one of the 50 states (very often in Delaware, because of its corporation-friendly laws.) But these characteristics can also be fuzzy, because many US companies sell their products globally and have company assets in many foreign countries. And many foreign stocks are listed on the New York Stock Exchange and their products are part of our daily life. When it comes to international stocks, investors think broadly in terms of developed markets and emerging markets. Developed markets are mature, modern, and much like the US. Emerging markets are less modern and less mature, and are characterized by high expected growth and high potential risks. Examples of the risks include unstable governments or reliance on one or few natural resources for their economic production. It is also conventional to think about world regions in categorizing global stocks. The developed nations are generally Great Britain, France, Germany, Spain, Netherlands, the Scandinavian countries, Japan, Australia, and Canada. Most emerging market economies are in Asia, Africa, or South America. The biggest emerging market category is now commonly called the BRIC, for Brazil, Russia, India, and China. It should come as no surprise that within each of these countries or regions there are large and small companies, and there are growth stocks and value stocks.

Sectors and industries. Another way to group stocks is to recognize where they exist in the economy. At the top are the economic sectors, and within these sectors are industries, sub-industries, and segments. There are a few sources that define sectors and categorize companies into them, with the two most prominent being Dow Jones and Standard & Poor’s. Both slice the economy into ten sectors (with the only difference being in how they categorize consumer companies). The common sectors are: financial, technology, energy, materials, healthcare, telecommunications, and utilities. S&P divides consumer companies into consumer discretionary and consumer staples, while Dow Jones groups them as consumer goods and consumer services. While it’s beyond the scope here to list all the industries, sub-industries and segments within these sectors, here’s a sampling of industries in each: