When you talk to your Financial Advisor, it might feel like they speak a different language. “What’s a Mega Cap Tech stock?” you may wonder as your advisor plows through a dense investment presentation.

Every profession has its jargon understood by insiders – finance is no different. While every advisor’s goal should be to speak plain language, jargon is sometimes unavoidable.

In my ongoing quest to help you become a savvier, more confident investor, this month I’m defining three major ways stocks are categorized and why those categories matter.

Three Categories

Most stocks can be categorized in three ways: size, style, and sector.

Size, as implied, refers to how big the company is as measured by its value. That value is referred to as Market Capitalization or Market Cap.

Style is usually either growth or value. This refers to how a company’s stock behaves in relation to other stocks.

Sector refers to the part of the economy that a company operates in.

Let’s look at each category in more detail.

Size

A company and its stock can be categorized as Micro Cap, Small Cap, Mid Cap, Large Cap, or Mega Cap. Where a company falls in these categories is determined by its Market Capitalization, or Market Cap for short.

Market Cap is the value of all outstanding shares combined. If a company has 1 million shares outstanding and each share is worth $10, the company’s Market Cap is $10 million.

While there’s no hard and fast rule, the grid below shows a commonly accepted breakdown of the different sizes.^[1]

Generally, the larger the company, the less risky its stock tends to be because larger companies are often better established and more stable than their smaller peers.

But size is just one piece of the puzzle.

Style

A company and its stock can also be categorized by its style as either Growth or Value. There are other style designations like Income, Blue-Chip, Defensive, Cyclical, and Non-Cyclical, but they are less commonly used.

To be defined as a Growth stock, a company must generally be expected to grow significantly above the average for the broader market.

To be defined as a Value stock, a company must generally be perceived as cheap compared to its intrinsic worth. As the name implies, the stock is considered a good value.

Growth stocks offer a higher potential reward, meaning they come packaged with more risk relative to their non-Growth peers.

Value stocks are generally understood to be less risky than the broader market.

Sector

Our economy is divided into sectors. A sector is a group of businesses that are engaged in similar activities.

There are eleven widely accepted economic sectors. Those are:

1. Communication Services
2. Utilities
3. Real Estate
4. Consumer Discretionary
5. Health Care
6. Consumer Staples
7. Financials
8. Energy
9. Information Technology
10. Industrials
11. Materials

Because each sector is engaged in a specific type of business, companies in each sector will behave differently in different economic environments.

For example, in an economy growing quickly, where the job market is strong, and consumers are confident, you might expect the Consumer Discretionary sector to do well.

Conversely, you might expect Consumer Staples to do well in a slowing economy since these items are considered essential.

Knowing where a company sits within the economy can help you understand what to expect from that company in various economic environments.

Making Sense of the Three Ss

Let’s apply what we’ve learned by categorizing three companies using the Three Ss.

BigBank Group

BigBank Group has a Market Cap of $86.28 billion, which makes it a Large Cap stock. Its primary business is Financial Services, and it is widely considered a Value stock.

This tells me that BigBank Group should be less risky on a relative basis because it is larger and is considered a Value stock. I also know that BigBank Group will likely be sensitive to changes in interest rates because it’s in the Financial Services sector.

Expedition Diagnostics

Expedition Diagnostics has a Market Cap of $15.07 billion, which makes it a Large Cap stock. Its primary business is in the Healthcare sector.

Expedition Diagnostics should be less risky on a relative basis because it is larger and is not a Growth style stock. Expedition Diagnostics would also be sensitive to changes in the health insurance market as well as to an aging and less healthy population.

Orange Inc.

Orange Inc. has a Market Cap of $2.85 trillion, making it a Mega Cap stock and widely classified as a Growth style stock. Its primary business is in the Technology sector. However, some business units could also fit into the Consumer Discretionary sector since it produces Consumer Electronics and other consumer goods and services.

This tells me that on a relative basis, Orange Inc. is riskier due to its status as a Growth stock. Orange Inc. would be sensitive to an economic downturn as consumers are less likely to upgrade their devices or purchase non-essential services in hard times. Conversely, Orange Inc. should do well after a recession as consumers spend money again.

Why does all this matter?

If you have a frame of reference to distinguish one stock from another, you’ll have a better idea of the risks you are taking, what could help your portfolio, and what could hurt your portfolio. Knowing what to expect will help you choose investments that better suit you and help you manage your reactions to the results you get in both rising and falling markets.

In short, knowing the three Ss will help you become a better investor.

Want to learn more? Contact me!

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

^{[1] For more on Market Cap you can visit https://www.finra.org/investors/insights/market-cap}

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