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Formulating Your Personal Stock Buying Strategy

In my previous post I wrote about getting Started Investing In Stocks. Now that you are ready to start investing, you have to select the type of stock that is best for you. It’s important to invest in stocks that fit your overall investment strategy. To help you with your investing decision, here is a breakdown of the three different categories of stocks.

  • Large Cap Stocks

Large cap stocks are the best friend of the safe conservative investor. Large caps are generally regarded as stocks that have market capitalizations over $10 billion dollars. These are the companies that are the staples of the United States and other economies. Companies like Proctor & Gamble, Exxon, Target, and Yum Brands are some of the largest companies in the United States. They are also the backbones of American industry. You can also invest in foreign large cap stocks like Baidu, China Mobile, and BP. The great thing about large caps is that they have higher margins of safety. A big company with a large amount of assets is a lot less likely to go out of business than a smaller company with fewer assets. Many large caps also offer investors additional income in the form of dividends.

  • Mid Cap Stocks

Mid cap stocks are a hybrid of large caps and small caps. Mid caps have market caps that range from $1 billion dollars to $10 billion dollars. Investors in mid caps get the best of both worlds. These companies are in stronger financial shape than small caps but offer more growth potential than large cap stocks do. Companies like Panera Bread, Reliance Steel, and Fluor Corporation fall in the mid cap territory. Since mid caps are smaller than large caps, they tend to move up and down quickly which can be advantageous or disadvantageous to investors depending upon the direction. You can find income and growth potential in many mid cap stocks

  • Small Cap Stocks

Small caps include penny stocks, micro stocks, and all small publicly traded companies. Small cap stocks are attractive to investors for their growth potential. Small cap investors buy these stocks hoping to catch the next great company in its early growth phases. Small cap stocks are stocks with market caps that are valued at $2 billion dollars and below. These stocks very rarely pay dividends since earnings are used to fund expansion. Companies like hhgregg and Buffalo Wild Wings are small companies that are looking to becoming household names over the next decade. These companies often have limited cash and high amounts of debt. Small cap stocks are dangerous and belong in the portfolio of risk taking investors. Many small cap companies are just as likely to become the next great American business as they are to become an also ran.

Final Thoughts

Now that you know about the different classes of stocks and what to expect from each one; you should be able to successfully pick the type of stocks that best fits with your investing goals.