Choosing stocks
There are several ways to categorize stocks.
Growth & value
Companies generally fall into 1 of 2 categories depending on how they make money for their investors.
Growth companies are in an expansion phase. Any available money they have is likely to be funneled toward the expansion of their businesses or the development of new products and services. As they grow, the value of their shares increases.
Value companies are relatively established. While they may still be growing, there's not as much room for the kind of rapid expansion that growth companies pursue. So rather than plow all their cash flow into opportunities for development, these companies are more likely to pay dividends.
Capitalization
Companies can also be divided up based on the total value of their shares—their "capitalization." Stocks are generally considered to be large-, mid-, or small-cap, although at the extremes you may also see references to mega-cap or micro-cap stocks.
The boundaries between one grouping and the next aren't firm, and they change as the overall market value changes. In general, large-cap stocks make up about 65% to 75% of the entire market, and mid- and small-cap stocks about 10% to 15% each.
The stocks of large-cap companies tend to be more stable than those of smaller companies. But smaller companies may have more potential for growth.
Sectors
Companies can also be grouped by sector. As with capitalization, there are several different sector classification systems. Most systems include categories like technology, health care, and energy.
Stocks within particular sectors will tend to react in predictable ways to economic conditions, so it's important to make sure your investments don't get too concentrated in specific sectors, unless you're doing it intentionally as part of your investment plan.
For example, when the economy is doing poorly, sectors like information technology, consumer discretionary, and telecommunication services may suffer because people can choose to spend less in these areas.
On the other hand, people must keep spending on things like consumer staples, utilities, and health care, so these sectors may be less affected.
It's also important to note that good or bad news about a company's stock may affect other companies within that sector to some degree.
See more about our sector mutual funds
See more about our sector ETFs
Here's one sample classification system and the types of companies that would fall under each.
