THE BASICS #9: SECTORS & INDICES
There are thousands of publicly traded companies in the US. That means there are thousands of stocks that you can invest in. But who has time to properly research all of them?
Luckily, stocks are placed into broad categories using various characteristics, which allows us to invest in a handful of stocks at a time. You may not have realized it, but if you put money into a 401(k) plan or your child’s college fund, you’re already taking advantage of these groups! Not only does this save us countless hours of research, but it also affords us something called diversification. We haven’t talked about diversification yet, but in simple terms, it means not putting all of your eggs in one basket.
So how are stocks organized?
#1 - BY SIZE (AKA MARKET CAP)
As mentioned in the video, size does not mean price! Size refers to a company’s market cap, or total market value. (For an explanation of market cap, see THE BASICS #8.) Just like t-shirts, the major sizes are small, medium (mid), and large. There are also a few others at each end of the size spectrum: the XXS companies (nano caps), the XS companies (micro caps), and the XL companies (mega caps).
- Nano Caps: Valued at under $50mm
- Micro Caps: Valued between $50mm and $300mm
- Small Caps: Valued between $300mm and $2bn
- The term “small” is a bit misleading. Many small cap companies are actually very large corporations!
- Examples include WebMD, Shake Shack, and Burlington Coat Factory.
- Mid Caps: Valued between $2bn and $10bn
- Examples include Foot Locker, Tupperware Brands, and Buffalo Wild Wings.
- Large Caps: Valued between $10bn and $100bn
- Examples include UPS, Starbucks, Netflix, and Costco
- Mega Caps: Valued at $100bn or more
- Examples include Facebook, Amazon, and Exxon
*Take a look at your 401(k) plan or other generic investment account - I’ll bet you see options related to these groups!*
#2 - BY SECTOR (AKA BUSINESS CATEGORY)
The economy is divided into about a dozen different sectors. Those sectors are then further divided into smaller, more specific groups called industries. The major sectors and a few of their industries are:
- Consumer discretionary - things we buy when we have extra money to spend
- Industries: Auto, Media, Hotels and Leisure, Retail
- Consumer staples - things that we, as consumers, can’t live without
- Industries: Food/Beverage, Personal Products, Household Goods
- Industries: Chemicals, Construction Materials, Metals and Mining, Paper
- Industries: Aerospace/Defense, Construction Services, Electrical, Transportation
- Industries: Equipment and Services, Oil and Gas
- Industries: Banking, Insurance, Asset Management, Real Estate
- Industries: Biotech, Equipment, Providers, Pharmaceuticals
- Information Technology
- Industries: Software and Services, Semiconductors, IT Services, Technology Hardware
- Industries: Wireless Telecommunications
- Industries: Electric, Gas, Renewable Energy, Water
#3 - BY INDEX (AKA STATISTICAL VALUE TRACKING)
An index measures the average combined value of a certain group of stocks. If the average is increasing, the index goes up. If the average is decreasing, the index goes down.
**Important!! An index is only an average, so if it’s up, that does not mean that each of the stocks it tracks is up too. Individual stocks move independently. Their combined movements make up the overall stock market.**
- S&P 500 - tracks 500 of the largest and widely-traded companies in the US (not the 500 largest!)
- Often referred to as “the market” because of its broad scope
- DJIA (Dow Jones Industrial Average) - tracks 30 of the largest and most influential companies in the US like Apple, Disney, GE, McDonald’s, Verizon, and Wal-Mart
- Often referred to as "the market" as well
- Nasdaq Composite - tracks all Nasdaq-listed companies
- Russell 3000 - tracks 3000 of the largest publicly traded companies in the US
- Russell 2000 - tracks the 2000 smallest stocks in the Russell 3000