Different shares have different characteristics
Companies whose shares are traded on the London Stock Exchange vary enormously. The smallest companies are valued at less than £1 million. The largest are valued at more than £90 billion. Some are based in the UK and derive most of their earnings from Britain.
Some are based overseas and many are international, headquartered in one country but doing business in several locations.
Naturally too, these companies operate in different fields, ranging from biotechnology to banking and from engineering to oil exploration.
From an investor’s perspective, it is important to recognise that different shares have different characteristics, depending on the size and nature of the company in question.
In stockmarket terminology, a company’s value is measured by calculating how much its shares are worth in total.
If a company has 1000 shares in issue and each is worth 100p, for example, the company is capitalised at £1000. If the share price rises to 150p, the company will be capitalised at £1500.
This is often referred to as a company’s market cap.
The biggest companies on the Exchange are often known as Large Caps; those in the FTSE 250 can be described as Mid Caps and the smallest shares are known as Small Caps.
Large Caps are sometimes referred to as Blue Chip shares and many of them share certain characteristics. Typically they are more heavily traded than smaller stocks, which make it easier for investors to buy and sell them. Technically speaking, they are more ‘liquid’, which essentially means they are easier to trade. Smaller company shares, by contrast, can be less liquid which means their shares are traded less regularly.
Stockbrokers tend to divide shares into different categories, such as defensive versus cyclical or growth versus income. Defensive stocks are those which are likely to do better when the economic environment is harsh. These companies are involved in sectors, such as utilities, pharmaceuticals or food retailing, that are less dependent on external economic conditions.
The performance of cyclical stocks is more influenced by the economic cycle. They can do extremely well during good times but may suffer badly during a recession. Such stocks include clothing retailers, banks and recruitment businesses.
Larger companies are often at a more mature stage of their development. They have long-standing relationships with customers and suppliers, they are highly profitable and their future seems assured. They may not be growing in leaps and bounds each year but they are expanding steadily and paying dividends to shareholders. Shares that pay regular and generous dividends are known as income stocks.
Smaller companies are often younger and their business model is less tried and tested. They have plenty of potential to grow but they are also more risky from an investment perspective. They are known as growth stocks.