By now, you probably have it figured out that you have a lot of things to consider when it comes to investing in the stock market. To help make your investment decision, it is a good idea to understand the various categories of stock market investments there are on offer.  Each category of stock market investing has different characteristics, and you should look for the one that best meets your investment needs.

You should also consider how the stock was chosen will fit into your overall portfolio of investments in terms of risk and reward. If you have a mix or low-risk assets in your portfolio currently, you can afford to invest in some riskier areas of the stock market. This is, of course, assuming you have a preference to do so.

Not all investors like volatility and risk when it comes to the value of their investments. If you have a more conservative personality when it comes to investing, you might choose to invest in a lower risk area of the stock market.  Knowing the various categories will help you best pick the stock for your needs.

  • Blue Chip Stocks

What are they?

Blue chip stocks refer to equity in well-established businesses and companies. These are normally very financially stable and sound and typically these companies have been operational for a significant number of years.  These companies normally have large market capitalizations – often in the billions of dollars.

How are they defined?

Blue chip stocks are usually a market leader in their industry and a common household name. Although not all, most blue chips have a history of paying stable and sometimes rising dividends consistently over some years. The term blue chip comes from poker – blue chips are the most highly prized and expensive. Blue chip stocks will be one of the constituents of the major indices for a region. These stocks have market cap values exceeding $2billion – i.e. these assets exceed $S 2.7 billion in market cap.

Examples

For example, Singapore Telecommunications, from the Telecoms sector is the biggest stock by market capitalisation in the Straits Times Index (an index which tracks the 30 largest Singapore shares). This stock has a market capitalisation of S$B67.7 and has been an excellent performer as an investment over the past decade. The stock maintains a dividend payout ratio of between 60% to 75% of the underlying net profit.

Other examples of blue chip stocks include DBS Group Holdings and Overseas-Chinese Banking Corporation, which are from the banking and financial sector with market capitalizations of S$B49.7 and S$B41.6 respectively. These stocks have also paid out consistent and rising dividends over the past years of performance.

Should I buy them? Pros and cons

The benefit of owning a blue chip stock is that it is lower risk and can provide you with a steady income through regular dividends. However, there are still risks to your investment – blue chip stocks can suffer from downturns in performance. Two fairly recent globally famous examples are General Motors and Lehman Brothers, which collapsed under the global recession of 2008.  Even the best companies are at still at risk of suffering losses.

  • Small Cap Stocks

What are they?

Small cap stock investing refers to companies with smaller market values. They are normally less well-established firms and may not necessarily always pay a dividend. If you do some research, you can find good opportunities in this equity market which will pay regular dividends and also present good growth prospects.

How are they defined?

These stocks are ones with small market capitalizations. They have a market capitalisation roughly between $300 million and $2 billion. Stocks below this market capitalisation are referred to as micro caps, and those below $50 million are called nano caps.

Small cap stocks are still large enough to trade on stock exchanges. Be careful – classifications such as large cap or small cap can vary depending on the context and also varies between brokerage houses. The terms are loose approximations that can vary over time also.

Examples

As a prominent example, there is Singapore Post, which is stock from the industrials sector with a market cap of S$ 3billion, which has performed positively and stable over the past five years delivering good performance – almost doubling in value. Keppel Reit from the financial sector and SATS Ltd from the industrials sector are also good examples of Singapore small-cap stocks, with market caps of S$ 2.2 billion and $S 2.15 billion respectively, that have delivered good investment performance over the past few years.

Should I buy them? Pros and cons

One of the biggest advantages of investing in small-cap stocks is the opportunity to find undervalued investments. They have a huge growth potential. Also, mutual funds cannot invest in them because of regulatory restrictions, and this means you have access to an investment opportunity that hasn’t been crowded out by bigger buyers.

However, on the flipside, there is more risk in this segment of the stock market – based on the fact that these companies have fewer reserves in case of downturns in addition to a higher likelihood that the company may not have been established for as long as larger cap stocks. Less experience can mean less skill in navigating the business successfully, placing your investment at more risk.

Know Yourself And The Market Before Investing

  • Micro Cap Stocks

What are they?

Stocks with a market capitalisation of between $2 billion and $50million are referred to as micro caps.

How are they defined?

These stocks can also be listed publicly on stock exchanges and are smaller than large caps and small caps but larger than nano caps. Keep in mind that as a general rule larger market capitalisation stocks have less risk to your investment, but this comes with smaller the potential returns. The opposite is also the case on average – the smaller the market capitalisation, the greater the potential returns but this comes at the cost of potentially larger risks.  These stocks are known for their volatility.

Examples

A popular example is Croesus Retail Trust with a market cap of $S 0.37 billion from the financial sector that has achieved only sideways movement overall in share price over the past few years despite achieving lows of 0.85 SGD and highs of 1.18 SGD and a current share price of 0.94 SGD.

Stamford Land Corp is another example with a market cap of $S 0.27 billion from the consumer discretionary sector that has achieved lots of intermittent highs and lows over the past few years but sideways movement in price overall. CSE Global, with a market cap of $S 0.26 billion from the IT sector has also performed in a similar fashion.

Should I buy them? Pros and cons

Because there is much higher volatility associated with investing in these stocks, there is the potential for large swings in price. On the positive side, this means that gains can be significant and over a short timeframe and the reverse is also true – large losses can occur in a very short space of time. This is the biggest disadvantage of investing in microcaps.

The best approach is to focus on a particular segment to meet your risk and reward requirements and investment goals. Once you have focussed in on a sector, you can research the individual stocks to see whether it is a good investment choice for your portfolio.

How to Invest in the US Market and Stocks in Singapore

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C.E.O @ The New Savvy
Anna Haotanto is passionate about finance, education, women empowerment and children’s issues. Anna has been featured in CNBC, Forbes, The Straits Times, Business Insider, INC and The Peak Singapore. She was nominated and selected for FORTUNE Most Powerful Women conference in 2016 (Asia) and 2015 (San Francisco, Next Gen). Anna has 10 years of experience in the financial sector and is currently a Director in Tera Capital. Her previous work experience includes positions at Citigroup, United Overseas Bank, a regional role in Business Monitor and a boutique private equity firm based in Shanghai. She graduated from Singapore Management University (Finance and Quantitative Finance).