Stock and bond classifications and indexes

Stocks are classified in several different ways.  The first way is with regard to their market cap.  They are classified into small cap, mid cap and large cap, generally as follows:

Small cap – less than $2 billion
Mid cap – $2 billion to $10 billion
Large cap – over $10 billion

Another common classification is by industry segment, for example, utilities, information technology, consumer discretionary, materials, financials, energy, health care, telecom services and consumer staples.

Let’s not forget that there are stocks representing both domestic and foreign companies.  The market capitalization of all US based companies is a little over ½ of the value of all worldwide traded stocks.  Many of these foreign stocks are traded on US exchanges.  Others can only be traded on the exchanges in their home countries.  Also, keep in mind that many US based companies do significant amounts of their business in foreign countries even though they are considered a “domestic” company.  These would be referred to as multi-national corporations.  For example, McDonalds (MCD) has restaurants worldwide.  So if you own their stock you would consider it a domestic stock even though it derives more than half of its revenue from outside of the US.  Why is this significant?  McDonalds is not dependant upon just the US economy for its growth.  Also, there is a level of “currency” risk for multi-nationals.  The earnings from their foreign operations must be “repatriated” to US dollars.  When the US dollar is weak, this tends to boost their foreign earnings when converted to dollars.  Conversely, when the dollar is strong, this will reduce their foreign earnings.

Stock indexes are a way to group stocks in various related ways.  This provides a way to evaluate or address a related group of stocks using a single reference point.  For example, there are indexes based upon market cap and indexes based upon industry segment.  There is an index classification for growth stocks versus value stocks.  Also, there are indexes that combine one or more of these classifications, for example, an index for large cap growth stocks, etc.  So, you can see that the number of indexes can grow quite large.  Some of the most well known stock indexes are the Dow Jones Industrials, S&P 500, Nasdaq 100 and Wilshire 5000.

Naturally, there are indexes related to foreign stocks.  One of the most referenced is EAFE (Europe, Australasia and the Far East).  Naturally, there are market cap and industry sector indexes for foreign stocks as well.

As for classifications for the universe of bonds or fixed income investments, there are corporate, agency, municipal, US Treasuries, high yield and of course, foreign bonds.  When bonds are issued they are assigned a credit rating by agencies such as Moody’s or Standard and Poors.  Now, you may recall that credit rating agencies played a significant role in the run up to the collapse of credit markets in 2008, so, as always, buyer beware.  These credit ratings are supposed to reflect the credit worthiness of the bond issuer and indicate the possibility of a default.  These ratings can change after the debt has been issued if the finances of the issuer change significantly.  During the credit crisis, the ratings for lots of companies were downgraded, especially for banks and other financial institutions.  Debt issued by the US government is considered to be the safest of all.  Everything else will be rated accordingly.

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