Friday, October 27, 2006
Large Cap, Small Cap, Pink Sheet, Blue Chip
You’ve heard them all there are tons of names for stocks but I’m going to go over the following terms and tell you what they mean.
Blue chip
Large Cap
Mid Cap
Small Cap
Penny Stock
Pink Sheets and Over the Counter
Blue Chips:
Blue Chip stocks are the biggest companies on the markets. Wal-Mart, Exxon and Microsoft would be perfect examples for blue chip stocks. They are the tried and tested stocks on the market with market capitalizations of billions. Blue Chip stocks are usually the leader of the field. Intel would be a Blue Chip in the processor industry as Microsoft is in the software scene. These stocks often create an average return on your investment. They make good long term investments for anyone who doesn’t like a lot of risk. Lets be real, how possible is it that Wal-Mart will disappear in the next ten years? Highly unlikely. The DJIA, Dow Jones Industrial Average, is comprised of the best 30 Blue Chip stocks on the market. $1 invested in the Dow in 1980 would bring back $13 today, Blue chips will always be great investments.
Large Cap
Large Cap stocks are those that have a large market capitalization but aren’t as big or great as blue chips. Large cap simply means that their market value is very high. Google is a good example of a large cap stock with a $147,000,000,000 ($147 Billion) dollar market capitalization or worth. Large caps require a large amount of money flowing into the stock to push it upward. If Google were to go up just 1%, $1.47 billion dollars would have to flow into the stock. High numbers like this mean that movements in the stock’s price should be steady and flowing, not choppy and volatile. Large caps will return better over the long run than blue chips because of smaller market values than the blue chip stocks.
Mid Caps
Mid Cap stocks are smaller than large caps and usually worth $1 billion to $5 billion in market capitalization. These stocks, because of their relatively small market cap compared to large caps, move much greater over time because it only takes a few billion in added worth to double the price of the stock. All of the large cap stocks were once mid caps, even Wal-Mart was once worth just $1 billion. (Now its worth $215 Billion) Mid caps have been consistent in the gains over time. Mid cap funds have proven to beat large caps by a few percentage points each year. While this might not seem like a lot, after compounding it could mean the difference between a $1M portfolio and a $2M portfolio. That definitely makes a dent in any retirement plans. 
Small Cap
Small Caps are even smaller than Mid Caps, usually worth less than $1 billion. (Take in mind all these depend on the investor, people who are used to investing in blue chips might think of a small cap of being worth $50 billion or less!) These stocks over the long term have produced better gains than mid caps and large caps however year to year they are much more volatile. Risk is always paid off with a better reward and that certainly is true with small cap stocks. Generally small caps aren’t household names like large caps and are usually confined to one region. This gives them much more room for expansion and higher growth rates. Its always easier to double the worth of a small corporation than a big corporation because a small corp needs less money and has more markets untouched than a large corporation. Small caps have been great money earners and over history have done better than mid and large caps. Don’t be fooled though, when the market moves downward, small caps often lose the most percentage-wise.
Penny Stocks
Penny stocks include any stock worth less than a dollar a share but as a dollar has slowly lost its value, we’ve come to accept any stock with a value of less than $5 a share as a penny stock. Penny stocks are usually old high flyers who were worth $10s of dollars per share but have fallen, but this is not always the case. As with anything, there are always those diamonds in the rough that can make you a fortune. For the everyday investor I would not recommend penny stocks because of the volatility and most are just corporations waiting to go bankrupt.
Pink sheets
Pink sheets are the low of the low. The lowest you can get. These are basically bankrupted corporations that still exist on a cheap exchange called the pink sheets or bulletin boards. These companies may or may not still be in existence and many are used to commit fraud. I do not recommend pink sheets to anyone, even market experts. There is no rhyme or reason to pink sheets or why you should be involved with them. Stay away from these stocks, there is a reason why they aren’t on the real exchanges.
There you have it, all the definitions of stock terms. I will try to keep this list updated as much as possible, if you have a term that applies to the value or position of a stock then leave a comment and I will add it to the list.
Remember, stick with no less than small caps if you aren’t a full time investor with a lot of capital or it may come back to bite you.