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Stocks can be classified according to the market capitalization of the company. The marketcapitalization of a company represents the total dollar value of the company's outstanding shares. This is equal to the currentmarket price of its stock multiplied by the number of shares of stock that it has outstanding. That number gives you the market value of the company, which is one measure of the company's size. Roughly speaking, there are three basic categories of market capitalization: large cap, mid cap, and small cap (although some analysts include others such as mega cap at the large end and micro cap at the small end). The definitions for each of these might vary somewhat depending on whom you're talking to, but usually they are as follows:
Large cap: market cap valued at more than $10 billion
Mid cap: market cap valued between $1 billion and $10 billion
Small cap: market cap valued at less than $1 billion
In general, the larger the cap size, the more established the company, and the more stable the price of its stock. Small cap and mid cap companies usually have a higher potential for future growth than
large cap companies, but their stock tends to fluctuate more in price.
Penny Stocks
A penny stock is a stock priced under one dollar pershare (or in some cases, under five dollars per share). Most penny stocks have only a few million dollars in nettangible assets and have a short operating history. Penny stocks are almost always small cap stocks, but the reverse isn't necessarily true. The term "penny stock" is sometimes used in a derogatory fashion, since many penny stocks are virtually worthless and should be considered extremely high-risk investments. There are also many cases of fraud involving penny stocks each year . We recommend that beginners steer clear of penny stocks.
Defensive stocks are the opposite of cyclical stocks: they tend to do well during poor economicconditions. They are issued by companies whose products and services enjoy a steady demand. Food and utilities stocks are defensive stocks since people typically do not cut back on their food or electricity consumption during a downturn in the economy. But although defensive stocks tend to hold up well during economic downturns, their performance during upswings in the economy tends to be lackluster compared to that of cyclical stocks.
A tracking stock is a type of common stock that is tied to the performance
of a specific subsidiary of the company. This means that the dividends and the capital gains for the stock depend upon the subsidiary rather than the company as a whole. Owning a tracking stock does not give the ownervoting rights in the corporation, nor do owners of tracking stocks have a legalclaim upon the general assets of the corporation. A company will sometimes issue a tracking stock when it has a very successful division that it feels is under appreciated by the market and not fully reflected in the company's stock price.