Classifications of Stocks

Stocks are grouped into classifications.stock market analysis screenshot image by .shock from Fotolia.com

If you are thinking about investing in the stock market, you may just think you put your money in, buy a few stocks, and call it a day. However, there are more decisions to be made than choosing a company. You have to decide how you want your portfolio to be positioned depending on your investment goals. To help with this process, stocks are grouped into various classifications depending on their characteristics.

Capitalization

One of the most popular classifications of stocks is of capitalization. Stocks are often listed as "small cap," "middle cap" or "large cap" depending on the type of company that is issuing the stock. Large cap stocks are primarily issued by companies which are large, well-known and typically have a capitalization of $5 billion or greater. Mid cap stocks are issued by smaller companies which have been around for a while and may have some name recognition, usually with a capitalization of $1 billion to $5 billion. Finally, small cap stocks are issued by companies with under $1 billion in capitalization and are usually from newer companies that are not well known.

This classification of stock has to do with the location of the markets and the companies that issue the stock. You can buy stocks from companies that list on a European or Asian stock exchange, which usually have companies that are based in those areas. There are pros and cons to this method; you may not be as familiar with the companies that are listed on these exchanges, and while these markets are slightly dependent on what the U.S. markets do, they have their own market forces that act independently from your investments in U.S. companies.

There are two classifications which affect the income stream you may receive from your investments. Income stocks are stocks which typically pay a regular dividend, but may not grow much. A good example of this type of stock is a utility stock. Electric companies usually maintain a good enough return to pay a dividend, but their business isn't exactly growing. On the other side are growth stocks. These companies are positioned to experience huge growth because of their situation or business segment. Because the business environment is always changing, growth stocks can be a bit volatile and you probably won't be receiving dividends. However, you have the potential to have a huge return in a quick amount of time.