Types of Listed Companies and Stock Picks
In today’s posting we discuss a few more basic concepts we need to understand about the stock exchange and a very brief summary of methods used in picking stocks to buy. Finally I recommend a downloadable document that discusses stick picks in detail. Be blessed
Types of Listed Companies
These are grouped according to market capitalisation—small capitalization, medium capitalization, and large capitalization. Small companies over time have more growth potential but also have the largest potential risk of loss. Large companies tend to pay more in dividends than small companies and their stock prices do not tend to fluctuate as much. E.g. Econet when small would not pay dividend but currently pays very good and regular dividends. Its price is fairly stable as well.
They can also be grouped By Investment Objectives.
Growth companies – anticipate good sales and expansion that will result in profits and higher share prices. These growth stocks have a high price, although earnings may be low or non-existent. They are considered as rapidly expanding companies whose sales growth and earnings growth are expected to outpace that of the market. Normally priced at premium and do not pay dividends. Investors expect better returns in the future.
- i. Value companies are businesses which may be in a downturn, but the future prospects look good so their share prices are undervalued or priced lower than usual. Value stocks: have a lower price in relation to their earnings because investors may consider them a bargain. E.g. Tourism counters in Zimbabwe mostly fall under this category. They are good to watch and buy whenever possible. Dawn for example although it’s a property counter it was viewed negatively due to its exposure to African Sun as its main tenant. But now with CB Richard Ellis under its wings and its real estate ventures it is definitely a value stock to be monitored.
Income Companies: have a history of paying dividends. They tend to be large-caps and utility stocks, and are an especially appropriate investment for investors who require regular cashflow. Income stocks pay good dividends compared to other companies but there are no guarantees that these dividends will continue.
Methods of Stock Selection
Fundamental analysis. Main belief: a company’s future ability to increase revenues, profits and cash flow determines its share price. Evaluates the basic economic and industry forces that shape a company’s growth as well as the firm’s financial statements.
Technical analysis. Central belief: a company’s past share price and volume of shares traded determines the future direction of its share price. Technical analysis is a mathematical approach.
Index investing. A passive approach to investing that mimics the composition of a major stock index. There is little trading of stocks.
Gut feel – this is an intuitive sense of what to buy. What many people do not vrealise is that behind this, there is a certain level of undeclared analysis that took place.
For a more detailed review of stock picking techniques I strongly recommend that you check out www.investopedia.com and download their free stock picking tutorial. A clear understanding of this is critical to investors.