In the stock market there are many, many words for you to learn. So many that you can not simply learn them all in a day! I want to do a weekly post, called “Words of the Week” to teach you just that. This week i want to cover a few words just to get started. This week will be, Market Cap (Market Capitalization), Market Sectors, and Dividends.
Market Cap (Market Capitalization)
The Market Cap of a company can be found just be simply taking all the shares of a company and multiplying that number by the share price of the stock. (# of shares X share price) Investors and analysts like to group companies together based on their Market Cap.
- Large Cap: $10 Billion and up
- Mid Cap: $2 Billion – $10 Billion
- Small Cap: $300 Million – $2 Billion
- Micro Cap: Under $300 Million
These 4 different market caps are the typical ones that you will see when reading/learning about stocks, there are also 2 more that some people like to throw in there, they are:
- Mega Cap: Above $200 Billion
- Nano Cap: Under $50 Million
Large cap stocks, also know as “Big Cap” stocks are the biggest companies on the stock market. These companies are a good investment for the conservative investor as they make consistent gains over the course of years. Large cap companies are also the most likely to pay Dividends, Which we will learn more on later.
The name for mid cap is pretty straight forward, mid cap companies are in the middle, they are not giant but they are not tiny, they are good companies. These companies are good to invest in because they have a big possibility for large gains due to competition to be the next big company, there will be constant competition and battle over the customers and business of the industry.
A couple downsides to mid cap stocks are, they are smaller companies so in difficult times when business slows down, these mid cap companies might not have enough resources to keep going and possibly close down. The Second thing is that since these companies are smaller, you hear less news about them, it is harder to acquire reliable information as opposed to the bigger large cap companies.
Small cap companies are the companies that are still small, although they have made it through the initial first few years of business ( which is the hardest part of business, getting started) so some of these companies are just getting the ball rolling, they are just now starting to report strong earnings with good growth.
Even though these companies made it through the rough spots does NOT mean they are a good investment, they have very little cash on hand and risk the possibility of shutting down. Small cap stocks are Volatile and Risky!
Micro cap stocks are very very small companies, compared to the rest of the market. to you and i they might be big successful companies but we have to look at them in terms of the market as a whole. These companies are so small they some of them are NOT required to register with the SEC, this makes the information that you find pretty unreliable, its very hard to find good news on these companies.
There are a couple downsides to micro cap stocks, not only that its hard to find good news on these companies, but they also are traded on the OTC Market which means it will be hard to sell your shares when the time comes.
The word “Market Sector” is just a fancy way of saying “Line of Business”. Market Sectors help group similar companies together to compare how they move against each other.
There are 11 general market sectors:
- Basic Minerals
- Capital Goods
- Consumer Staples
- Consumer Cyclical
Under each of these sectors there are more sub sectors that help group companies even better, the sectors just get a general group for the company.
Dividends are GREAT. A dividend is when a company is doing good, better than they expected at the end of the quarter they will have extra money since they outperformed themselves. With that extra money the company can do one of many things, they could:
- Reinvest the money back into the company to fuel advertisement and growth
- Use the money to expand operations and open new facilities/stores
- Pay the shareholder a quarterly dividend as a thank you gesture.
While many companies do numbers 1 and 2 with their extra cash, the bigger “Large cap” companies are already established and do not need the extra money for advertisement or for expanding. Instead they will do option 3 which pays each individual shareholder of the company a certain amount from that extra cash they have, how much you get depends on how many shares you have. The more shares the more money you will make per dividend payout.
That leads me to the dividend dates, there are 4 main dates you should know about when investing in a dividend paying company:
- Declaration Date: The day the board of directors announces the dividend
- Ex-Dividend Date: The cutoff date for new investors, you must buy your shares BEFORE this date in order to be eligible for the dividend payout
- Date of Record: The day the company figures out who is getting the dividend check, the day you are finally on record as a shareholder. You are not on record the same day you buy the shares, you have to wait a couple days before you are in the companies records.
- Payable Date: Which i think is pretty straight forward, the payable date is the da the dividend checks are mailed!
If you are investing in dividend paying stocks then you might want to look into a DRIP, a DRIP also known as a “Dividend Reinvestment Plan” is the smart way to handle your dividend paying stocks. What a DRIP does is whenever you get paid a dividend by a company, instead of getting the check the company will take the money you made and instead buy more shares of stock for you. In return this will increase your position size every quarter (3 months) meaning every time you get paid a dividend it will be more than the last!!
People that continually collect and reinvest your dividend for many years as well as continually buying more stock to add to your position you will build a income that you could live off of. Many people live this way, they over a couple good dividend paying stocks which they use a DRIP to reinvest every time they get paid a dividend after 20-30 years you will be making good money just from your quarterly dividend payout. You have to be smart with your investments, dividend companies are better for the long run not the short term.
Don’t be selfish, SHARE with your friends and spread the wisdom, the stock market is for everyone!
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