Types of stocks

Types of stocks and stock exchanges

Large cap stocks

With the exception of large-scale spin-offs or privatizations, IPOs almost always involve small companies. Small companies attract a lot of attention from individual investors who want to get rich quick, but most people should spread their money into many different sized companies.

Here size means the market capitalization of the company, where market capitalization is the number of shares outstanding times the price per share. Stocks are normally broken into so-called large cap, medium cap, and small cap stocks.

Large capitalization stocks include the blue chip companies you're familiar with like GM, IBM, and Boeing. These companies are still growing, but generally at a slower pace. Large cap stocks are said to have market capitalizations of $5 billion or more.

Large cap stocks are represented by the Standard & Poors 500 stock index which tracks the 500 largest companies. The S&P 500 represents about 70 percent of the value of publicly traded stocks in America. Because large cap stocks normally have lower growth potential, the companies don't need to reinvest all their profits, so they distribute a good portion of their profits as dividends.

Mid-cap stocks

Next come the so-called mid-cap stocks. These are established companies that have been around for a while and have thousands of employees.

They are said to have market capitalizations of from $1 billion to $5 billion. These companies may have started to pay a small dividend, but they have good growth prospects, so they reinvest most of their profits to keep their businesses growing. Mid-cap companies are represented by the Standard & Poors MidCap index.

Small cap stocks

Small cap stocks are companies that generally have high growth rates and pay little or no dividends. Some small cap stocks don't even have any earnings. Here, people are obviously buying future growth.

Small cap stocks are represented by the Russell 2000 index. The Russell 3000 index represents the three thousand largest public companies in the US. The Russell 2000 represents the 2000 smallest companies in this group of 3000.

However, even the companies in the Russell 2000 index are fairly large companies. There are tens of thousands of even smaller companies that are traded in the US.