Welcome to Ameritrade Plus University
  Investing in stocks
Top 10 things
The details:

What is a stock?

Different kinds of stocks

How much should you pay?

Picking stocks

How to buy stocks
Take the test
  Setting priorities
  Making a budget
  Basics of banking
  Basics of investing
  Investing in stocks
  Investing in bonds
  Buying a home
  Investing in mutual funds
  Controlling debt
  Employee stock options
  Saving for college
  Kids and money
  Planning for retirement
  Investing in IPOs
  Asset allocation
  Hiring financial help
  Health insurance
  Buying a car
  Home insurance
  Life insurance
  Futures and options
  Family law
  Estate planning
  Auto insurance

|> About Money 101

investing 101

  Different kinds of stocks
Not sure what a small-cap is? Or why you should care? Read on.

There are more than 9,000 stocks to choose from, so investors usually like to put stocks into different categories. You can slice and dice the stock market into all sorts of different groups, but the most common ways are by size, style, and sector.

By size

When talking about a company's size, we're referring to its market capitalization, the current share price times the total number of shares outstanding. It's how much investors think the whole company is worth. Ford, for example, has 1.6 billion shares outstanding, and in February 2001, each share was trading for $28, for a total market capitalization of $45 billion. (Technically, if you had an extra $45 billion lying around, you could buy each share of stock, and buy the whole company.)

Is $45 billion a lot or a little? No official rules govern these distinctions, but below are some useful guidelines for assessing size.

Sizing up a stock
Category Market Cap
Micro-cap less than $500 million
Small caps $500 million to $2 billion
Mid-caps $2 billion to $10 billion
Large caps $10 billion to $100 billion
Mega caps more than $100 billion

Large-cap companies tend to be established and stable, but because of their size, they have less growth potential than small caps. As a result, over the long run, small-cap stocks have tended to rise at a faster pace. Krispy Kreme Doughnuts, a relatively new chain with a market cap of under $1 billion is slated to increases earnings at a 25 percent clip over the next five years, and its stock more than doubled in 2000. General Electric, the most highly valued company in the world with a market cap of more than $450 billion, has posted steady long-term returns, but don't expect a double anytime soon.

But there's a trade-off: With less developed management structures, small caps are more likely to run into troubles as they grow -- expanding into new areas and beefing up staff are examples of potential pitfalls. (Of course, even corporate titans get into trouble. Witness the stock-price collapse of AT&T in 2000 -- stockholders lost more than 60 percent of their money.)

By style

A "growth" company is one that is expanding at an above-average rate. Cisco, for instance, increased its earnings at a rate of nearly 40 percent a year in the late 1990s -- the average tends to run around 10 percent.

Catch a successful growth stock early on, and the ride can be spectacular. If you'd picked up 100 shares of Cisco in 1995, your stake would have cost you a little more than $3,000. By early 2001, that investment grew to $68,400.

But again, the greater the potential, the bigger the risk. Growth stocks race higher when times are good, but as soon as growth slows, those stocks tank. Cisco fell from grace in 2000, with a decline of more than 50 percent.

The opposite of growth is "value." There is no one definition of a value stock, but in general, its share price is in the dumps. Maybe the company has messed up, causing the stock to plummet -- a value investor might think the underlying business is still sound and its true worth not reflected in the depressed stock price.

A "cyclical" company makes something that isn't in constant demand throughout the business cycle. For example, steel makers see sales rise when the economy heats up, spurring builders to put up new skyscrapers and consumers to buy new cars. But when the economy slows, their sales lag too.

Alcoa, the leading aluminum maker, grew its earnings by 16 percent -- well above-average -- a year in the late 1990s, but might actually lose money if aluminum prices fall in the next recession. Cyclical stocks bounce around a lot as investors try to guess when the next upturn and downturn will come -- by the time you read aluminum prices are at a high, Alcoa probably has already peaked.

By sector

Standard & Poor's breaks stocks into 11 sectors, and 59 industries. Generally speaking, different sectors are affected by different things. So at any given time, some are doing well while others are not. Generally speaking, finance, health care, and technology are the fastest growing sectors, while consumer staples and utilities offer stability with moderate growth. The other sectors tend to be cyclical, expanding quickly in good times and contracting during recessions.

Sector watch
Sector Examples
Basic materials Nucor (steel)
International Paper (paper)
Capital goods Caterpillar (earth moving equipment)
Boeing (aircraft)
Communication services Verizon (local phone)
WorldCom/Sprint (long distance)
Consumer cyclicals Goodyear (tires)
Sony (electronics)
Consumer staples Anheuser-Busch (beverages)
Procter & Gamble (household products)
Energy Exxon/Mobil (petroleum)
Schlumberger (oilfield equipment)
Financial Citigroup (banking)
AIG (insurance)
Health care Merck (drugs)
Healthsouth (HMO)
Technology Cisco Systems (Internet infrastructure)
Nokia (cell phones)
Transportation General Motors (autos)
Norfolk Southern (railroad)
Utilities Southern Company (electric)
American Water Works (municipal water)

Next: How much should you pay?

© 2003 Cable News Network LP, LLLP.