Stock Pick Guide
Stock picks are the ultimate task when investing in the stock market. Stocks are of various risks with different return prospects, and investors should pick stocks whose likely risks and returns fit with investors' own levels of risk tolerance and return expectations. Stock performances as determined by market trading activities may or may not reflect the true value of stocks. Such potential mispricing may provide profitable stock-picking opportunities in which investors buy undervalued stocks and sell overvalued stocks. The nature of a company's business can also affect stock picking, given individual investing preference and economic conditions.
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Growth Stocks
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Growth stocks often command premium prices compared to their stocks' current book value, when companies can show promising future growth opportunities. The stock market tends to value stocks on a forward-looking, and sometimes speculative, basis pending actual results of unfolding events. While growth stocks can rise in prices further if earlier growth predictions prove to be true, their prices can also fall substantially if proposed business undertaking fails to materialize. Such market and business dynamics in growth stocks provide investors opportunities that have both high risks and high returns.
Value Stocks
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Value stocks likely offer certain degree of discounts relative to their stock's current book value, when companies have displayed some uncertainties as to whether they can keep up a steady earnings stream. When in doubts, the market is inclined to undervalue stocks that have yet to uncover their true value. While value stocks may see flat performances over extended periods of time, they could generate safer returns even when the market places only a fair valuation on the stocks. In general, value stocks are more suitable for investors who are more risk averse.
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Sectors and Industries
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Stocks from different sectors and industries often are of inherently different risks and returns. For example, stocks of risky technology companies and safe consumer staples are likely on the two extremes of the risk-return spectrum. Investors may have their own preferences among sectors and industries when picking stocks. Some investors may be more into investing in energy companies that are closely related to economic conditions, while others may be opted for non-cyclical stocks that can maintain a level of earnings even when the general economy falters.
Market Capitalization
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Market capitalization is a useful indicator of stock risk levels, and thus potential returns. A stock's market capitalization is calculated as its stock price timed by the total number of shares outstanding. While stock prices can certainly be different for different stocks, the difference in the number of shares outstanding among different stocks are far more bigger than price differential. Some companies may have millions of shares outstanding and others may have issued shares in the billions. Companies with the most shares outstanding are often the well-established, large-cap companies, while companies with less shares are likely the growing, smaller companies in the mid-cap and small-cap categories. The larger a stock's market capitalization is, the less risk the stock, as well as its potential return. And vice versa.
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