Home Beginner Market Structure The Financial Markets – Stocks

The Financial Markets – Stocks

144
0

Stocks

Stocks together with Bonds are Capital Markets, both provide financing to companies. The distribution of shares among thousands of participants provides the main financing capital for the corporation while diluting the financial risk among all shareholders.

A share is an “indivisible” fraction of property (capital) of a company. The owner of shares is called shareholder or stockholder. The stock or capital stock is the complete collection of shares into which company ownership is divided.

Fig 1 – One share of the Dutch East India Company (Public Domain)

Shares, as said, represent one fraction of ownership on a company. There are two classes of shares: Common stock and preferred stock.

The property of common stocks entitles its owner to voting rights that can be exercised in corporate decisions.

Fig 2 – Common Stock The Cuba Company 1933 – (Public Domain)

Preferred stock does not grant voting rights but entitles the owner to receive a defined per cent of dividend payment before any decisions on the dividends for the common shareholder can be taken.

Fig 3 – Preferred Stock Lehigh Valley Traction Company, 1900 – (Public Domain)

A convertible preferred stock carries the possibility to convert preferred shares to a pre-defined amount of common shares at a future date.

A shareholder can be any person or company, who owns one or more shares of a corporation. Both private and public companies have shareholders. Also, a company can buy its own shares, an activity called buyback.

Owing more than 50% of a company doesn’t entitle the shareholder the right to use the company’s properties and materials, because the company has legal status as a person, so the company owns its properties and assets.

Finally, owning shares doesn’t carry responsibility for liabilities for actions done by the company. Of course, if the company goes broke the only loss for shareholders is the amount of money they invested in their shares.

Stocks (and also bonds) are the least leveraged assets available to an investor. Leverage in stocks is limited to 2:1, and that only on a margin account, while the bond, by its nature, is unleveraged.

Classification of Stock Companies

Today, the world of stock trading is enormous in its variety. From the big behemoths of the 30 components of the Dow index down to penny stocks no trading in regulated markets, there is a vast collection of companies for the investor to choose. In the combined US stock markets there are listed around 10,000 companies.

Market Capitalisation

By market capitalisation ( Total shares multiplied by its share price), stocks can be classified in Four main groups:

Big-caps. Also called blue chips (the most expensive casino chips). Companies with a market capitalisation higher than $10 billion. Their most relevant indices are the Dow30 and the S&P500 in the USA, and EURO STOXX 50 on Europe.

Mid-Caps. Corporations whose capitalisation lies between 2 to 10 billion dollars. Its most relevant indices are SP-400 and Russell Mid-Cap in the US, and MSCI Europe Mid Cap Index in the EU.

Small-Caps. With capitalisation below 2 billion dollars, but above $50 million. The main US indices tracking them are the Dow Jones U.S. Small-Cap Total Stock Market Index and the S&P SmallCap 600. In Europe, it is tracked by the MSCI Europe Small Cap Index in the EU.

Micro-Caps. Companies having less than $50 million of capitalisation. These companies are followed by the Dow MicroCap index and MSCI Microcap. MSCI has a related index for European microcap as well.

Business Sectors

By sectors, companies are divided into 11 main categories, each of them tracked by several Index ETFs. (ETFs, or Exchange Traded Funds, will be discussed in the following article)

These 11 sectors are Financials, Utilities, Consumer Discretionary, Consumer Staples, Energy, Healthcare, Industrials, Technology, Telecom, and Real Estate. 

Below a summary description of every sector with the main ETFs available for the interested investor.

 



Financials

It includes banks, investment funds, insurance companies and real estate firms. The main revenue source of these companies come from mortgages and loans.

Popular Financial ETFs are

US:

  • Financial Select Sector SPDR Fund (XLF)
  • Vanguard Financials ETF  (VFH)
  • SPDR S&P Bank ETF in the US (KBE)

Europe:

  • IShares MSCI Europe Financials (EUFN)
  • SPDR MSCI Europe Financial (UCITS)

Utilities

Electric, water and gas companies. They usually enjoy a steady revenue based on fees and tariffs to a captive market of consumers and businesses.

Their representative ETFs are:

US:

  • Utilities Select Sector SPDR
  • Vanguard Utilities ETF
  • iShares Global Infrastructure ETF

Europe:

  • SPDR MSCI Europe Utilities UCITS ETF(EUR) UTIL
  • iShares STOXX Europe 600 Utilities UCITS ETF(DE)  (EXH9)

Consumer Discretionary

This sector englobes consumer, apparel, retail, media and consumer durables. This sector improves its revenue as the economy grows and consumer expending accelerates.

The representative ETF’s are:

US:

  • Consumer Discretionary Select Sector SPDR (XLY)
  • Consumer Discretionary AlphaDEX Fund (FDX)
  • Vanguard Consumer Discretion ETF (VCR)

Europe:

  • SPDR MSCI Europe Consumer Discretionary UCITS ETF
  • AMUNDI ETF MSCI Europe Consumer Discretionary UCITS ETF

Consumer Staples

The sector includes food and beverages companies, or companies producing goods the consumer is unlikely to cut from his budget. These companies have relatively stable revenues and are a good choice in defensive strategies against market downturns.

The representative ETF’s are:

US:

  • Consumer Staples Select Sector SPDR (XLP)
  • Consumer Staples AlphaDEX Fund (FXG)
  • Vanguard Consumer Staples ETF (VDC)

Europe:

  • SPDR MSCI Europe Consumer Staples UCITS ETF
  • AMUNDI ETF MSCI Europe Consumer Staples UCITS ETF

Energy

The Energy sector focus consists of oil and gas exploration and production, including refining. Their revenues are tied to the market price of oil and derived products.

The representative ETF’s are:

US:

  • Energy Select Sector SPDR (XLE)
  • Alerian MLP ETF (AMLP)
  • Vanguard Energy ETF (VDE)

Europe:

  • SPDR MSCI Europe Energy UCITS ETF
  • AMUNDI ETF MSCI Europe Energy UCITS ETF

Healthcare

The Healthcare sector is a diverse sector including among them hospitals, biotechnology, pharma and medical device makers.

The representative ETF’s are:

US:

  • Health Care Select Sector SPDR (XLV)
  • Nasdaq Biotechnology ETF (IBB)
  • Vanguard Health Care ETF (VHT)

Europe:

  • SPDR MSCI Europe Healthcare UCITS ETF
  • AMUNDI ETF MSCI Europe Healthcare UCITS ETF
  • Lyxor STOXX Europe 600 Healthcare UCITS ETF

Industrials

The Healthcare sector is a varied sector including among them hospitals, biotechnology, pharma and medical device makers.

The representative ETF’s are:

US:

  • Industrial Select Sector SPDR (XLI)
  • Vanguard Industrials ETF (VIS)
  • iShares Transportation Average ETF (IYT)

Europe:

  • SPDR MSCI Europe Industrials UCITS ETF
  • AMUNDI ETF MSCI Europe Industrials UCITS ETF

Technology

Technological companies are companies involved in electronics design and manufacture, Information Technology, including Operating Systems, databases, Internet, and Big Data. The revenues in this sector are sensible to the economic cycles.

The representative ETF’s are:

US:

  • Technology Select Sector SPDR (XLK)
  • Vanguard Information Tech ETF (VGT)
  • DJ Internet Index Fund (FDN)

Europe:

  • AMUNDI ETF MSCI Europe Technology UCITS ETF
  • Ishares STOXX Europe 600 Technology UCITS ETF

 


Telecom

Technological companies are companies involved in electronics design and manufacture, Information Technology, including Operating Systems, databases, Internet, and Big Data. These companies are getting their revenue from consumers and the rest of the companies.

The representative ETF’s are:

US:

  • Vanguard Telecom ETF (VOX)
  • iShares US Telecommunications ETF (IYZ)
  • iShares Global Telecom ETF (IXP)

Europe:

  • SPDR MSCI Europe Communication Services UCITS ETF
  • AMUNDI ETF Europe Communication Services UCITS ETF
  • Ishares STOXX Europe 600 Telecommunications UCITS ETF

 


Materials

This sector includes Forestry, Mining, refining, chemical and companies related to raw materials. These companies are in the lowest level of the supply and demand chain, therefore are sensitive to changes in the economic cycle.

The representative ETF’s are:

US:

  • Market Vectors TR Gold Miners (GDX)
  • Materials Select Sector SPDR (XLB)
  • iShares U.S. Home Construction ETF (ITB)

Europe:

  • SPDR MSCI Europe Materials UCITS ETF
  • AMUNDI ETF Europe Materials UCITS ETF
  • Ishares STOXX Europe 600 Construction & Materials UCITS ETF

 


Real Estate

This sector’s focus is residential, industrial and consumer real estate. The main source of revenues comes from rental income and capital appreciation.

The representative ETF’s are:

US:

  • Vanguard REIT ETF (VNQ)
  • Vanguard Global ex-U.S. Real Estate Index Fund ETF (VNQI)
  • Schwab US REIT ETF (SCHH)

Europe:

  • SPDR MSCI Europe Communication Services UCITS ETF
  • AMUNDI FTSE EPRA Europe Real Estate UCITS ETF
  • Ishares STOXX Europe 600 Real Estate UCITS ETF

 

 


References:

Some ideas were taken from Wikipedia on Stocks definitions and common terms

Sector classification information has been taken from etfdb.com, and I also used Google for European ETF info.

LEAVE A REPLY

Please enter your comment!
Please enter your name here