Choosing A Stock: What Kind Of Shopper Are You? What goes through your mind when you grab a shopping cart and browse the aisles at your favorite store? Are you willing to pay more for name-brand products, assuming they will give you lasting quality? Or are you a coupon clipper who's always on the lookout for a bargain? These characteristics could play out in your choice of stocks, too.				> Home > Glossary > Support
		Stock can be divided into two categories -- growth and value. Each may appeal to investors for different reasons.
		Growth companies are expected to have sustainable high rates of profit growth. These are either well-known, established companies, or promising newcomers that appear to be on a roll. Growth stocks may be expensive, but their appeal to investors is their sustainable growth.
		Growth-oriented investors are more interested in the overall increase in share value over time -- capital gains -- than in having regular income in the form of dividends. (Growth companies generally reinvest profits in the company rather than paying large dividends, or any dividend.)
		Value companies are for bargain hunters. These are companies whose stocks trade at relatively low prices -- perhaps because they have fallen out of favor with investors, but for no good economic reason. Value investors look for companies they feel are undervalued and whose earnings will increase. Warren Buffett, one of the wealthiest people in the world, made his billions as a value investor.
		The key with value stocks is to have the time to buy and hold, and wait to take your profit. These stocks could stay low for a while, but they could be less risky than growth stocks over the long term, because you would tend to buy a value stock when it was down (that's the whole point!). Conversely, you might be tempted to buy a growth stock just before its price fell if you wrongly believed it was going to continue its upward trend.
		Value investors often like cyclical stocks (cyclicals) -- companies whose fortunes are tied to economic cycles. Packaging materials is a good example. When the economy is booming, consumers buy more items, so suppliers ship more, and demand for packaging materials rises. In a recession, the opposite is likely to be true. But since cycles come and go, you can be pretty sure that buying into a company that supplies cardboard boxes when the stock is low, for example during a recession, will eventually pay off, because the economy will boom again.
		In general, growth and value stocks are classified by using a valuation measure such as a price-earnings ratio (the price of a stock divided by its earnings per share). Stocks with higher-than-average price-earnings ratios are considered growth stocks, while stocks with lower-than-average price-earnings ratios are labeled as value stocks.
		Cyclical Stocks
		Value investors often like cyclical stocks (cyclicals) -- companies whose fortunes are tied to economic cycles. Packaging materials are a good example. When the economy is booming, consumers buy more items, so suppliers ship more, and demand for packaging materials rises. In a recession, the opposite is likely to be true. But since cycles come and go, you can be pretty sure that buying into a company that supplies cardboard boxes when the stock is low, for example during a recession, could eventually pay off when the economy booms again.
		Income Stocks
		What are sometimes known as ‘income stocks’ can be attractive to investors because of the dividends they pay -- utility companies are a good example. These income-generating stocks generally fall in the category of "value" stocks. Since investment professionals like to categorize themselves either as "growth" or "value" investors, we’ll stick to those two categories in the discussion that follows.
		Market Cap
		Within the two general categories of "growth" and "value" there are different levels of market capitalization -- the amount of public money invested in the company. This delineation is somewhat fuzzy, but is sometimes drawn like this
		Large-cap: Over $10 billion Mid-cap: $1.5 -10 billion Small-cap: Less than $1.5 billion Micro-cap: Sometimes used to refer to small-caps below $250 million
		Morningstar, rather than using fixed numbers, takes a percentage of the total capitalization of the market at any given time to classify a particular stock. So, the top 70% of companies with the biggest market capitalizations are considered large-cap, the next 20% are labeled mid-cap, and the final 10% fall into small-cap.
		Here is an example to show how market capitalization is calculated. Company X has issued 25 million shares that have all been bought by investors (outstanding shares). They are priced at $10 a share. This means that Company X has a market cap of $250 million (25 million x 10), and falls into the small-cap category. Company Y has 1 billion shares outstanding, at $50 a share. Its market capitalization is $50 billion, placing it in the large-cap category.
		Companies with different capitalization levels tend to behave differently, which is why analysts make these distinctions.
		For example, smaller-cap companies tend to be relatively new or have a relatively small market niche. Their prospects for sustainability may be less certain than those of larger-cap companies, but on the other hand they have a potential for larger and faster growth. This translates into a higher level of investment risk as well as potentially higher returns.
		Large companies are generally well-established, and are often considered solid and reliable investments. However, they may be slower to react to changes and opportunities in the market, which could affect their performance.
		Some analysts look at mid-cap companies as being, on the whole, either small companies on their way up or large-cap companies on their way down.
		Another differentiating factor among different "caps" is how resilient they will be if a large investor decides to sell. If an investor sells 100,000 shares of Microsoft, a large-cap stock, this will not necessarily affect the stock's overall price because it represents a small percentage of the outstanding shares. But if an investor decides to sell 100,000 shares of a micro-cap company, this could send the stock price tumbling because it represents a higher proportion of outstanding shares.
		The stock portion of a well-balanced portfolio will likely mix capitalization levels, but may be tilted either toward value or growth stocks, depending on the investor's preference. It would be unusual to invest one-fourth of your stock portfolio in each of the four capitalization groups above: since large-cap stocks are about 70% of the total market capitalization and micro-caps just 3%, it is normal to give similar weights in one’s portfolio, unless the investor has specific preferences to the contrary.

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