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Ebook Investing in an uncertain economy for dummies: Part 2

(BQ) Part 2 book “Investing in an uncertain economy for dummies” has contents: Diversify your stock portfolio by country, employ a moderate portfolio, employ an aggressive portfolio, provide for large expenses, strategies for beginning investors, take advantage of retirement plan catch-up provisions, and other contents. | # 178 42 Diversify Your Stock Portfolio by Size By David McPherson Y ou can break down stocks into an almost endless number of categories. You can find growth stocks and value stocks, blue chips and orphans, industrials and financials. The list goes on and on. But the basic starting point is market capitalization, or size; that is, how much is a company worth? How big is it? Using the market-capitalization measure, stocks are categorized into three broad groups: large caps, mid caps, and small caps. These terms frequently appear in the names of mutual funds that focus on particular segments of the stock market. In this strategy, you look at one of the best ways to ease the uncertainty of investing in good times and bad: being sure your portfolio includes portions of large caps, mid caps, and small caps. This type of diversification can help you capture the strong performance of one category and offset the declines in another. For most individual investors, the best way to diversify by cap size is through mutual funds or exchange-traded funds (ETFs) rather than individual stocks. (See Strategy #21 for info on mutual funds; Strategy #23 discusses ETFs.) Know the Market Cap Categories The market-capitalization measure that people use to categorize stocks as large caps, mid caps, or small caps is a simple calculation that involves multiplying the number of outstanding shares in a company by the price of a single share. For example, a company with 100 million shares worth $10 each has a market capitalization of $1 billion. 48_401163-ch42.indd 178 9/3/08 9:18:56 PM #42: Diversify Your Stock Portfolio by Size 179 In defining market cap categories, different institutions use different standards that can change with market conditions. But in general, sizes are defined in the following manner: Large cap: These stocks represent the largest companies trading on Wall Street and usually feature companies with market capitalization of $5 billion or more. They .