Understanding the different sectors of an economy can help you make better stock picks. But there are other aspects to stocks as well; this video talks about the concepts of style and market cap.
Within each sector, investments can be divided into two styles: Growth and Value. Growth investors focus less on a company’s current earnings, and instead bet on a company’s ability to generate high growth rates in the future. Many famous venture capitalists, including Google investor John Doerr, are growth investors.
On the other hand, value investing tends to focus on companies with a low price to earnings ratio. The price to earnings ratio compares a stock’s current price to its historical earnings, usually over the last twelve months. The idea behind value investing is to find companies that have good solid fundamentals, but for some reason are currently “out of favor” with the market. The bet here is not that the company will experience a rapid growth rate, but instead that the good fundamentals will eventually cause the stock price to rise. Warren Buffett is a famous proponent of the value investing style.
Finally, companies are also categorized by their market capitalization. Any company over 10 billion is considered large-cap, any company over 2-10 billion is mid-cap, and any company less than 2 billion is considered small cap. Just like with sectors, its important to compare similar companies. Small-cap companies have very different needs and business processes from large-cap companies.
