Our favorite “futuristic investor” Cay-Low Mbedzi, yes that’s his name, is back with a couple of classic Investment 101 insights to get all the “newbie” INVSTRs investment fit.
Different stocks for different folks with different goals
Is it possible to make a lot of money in a short period? YES, but the answer comes with the question is there a lot of money to be lost as well in the process? YES
In the stock market, we have stocks with different market Capitalization (Market Cap) with different share prices, I define them as the following according to share value:
Cheap stocks (Penny Stocks)
- Stocks between 1c to R1 (100c)
Middle priced stocks
- Stocks between R1 to R100
- Stocks worth R100 and higher
The value range provided is what I use to determine if a stock MAY fall underway a specific market cap which is small, medium, and large.
Note that at some point, prices may differ which, may lead you to find a stock worth more than the above-given value, placed a different market cap position because of its total market capitalization.
What is Market Capitalization “Market Cap”? Well like said don't confuse the two, market cap and market value, so what is Market Cap? This is the total value a specific stock is given on the stock market as compared to the market value we are looking at the overall value of the company in a specific market.
How is Market Cap determined well it's simple, Outstanding shares multiply by share price? Lucky some sources do provide information such as the amount of outstanding shares, this then gives you the overall company, stock market value (Market Capitalization) as compared to a single financial asset (share value).
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But to get started on which stocks can be the best preference for growth depending on one's goals?
So firstly, note that:
Small-Cap does not pay dividends in most cases, perhaps you might find one or two but expect dividends pay-out to be 0.1c or anything less than sometimes 1c if you are lucky you might find a small-cap paying good dividends, these are in most cases your cheap or rather penny stocks in some cases.
Medium Cap stocks do pay dividends well that’s just some of them these are in most cases your middle-priced stocks.
With the majority of Large Caps paying dividends a lot, these are usually your expensive stocks.
So now, while these stocks fluctuate (move on the graph) differently depending on their size, your goals and ambitions are what should determine what stock you should invest in.
But why? In simple terms If you invest in the following such as
Cheap stocks, you can always expect more than 100% of your ROI but at the same time, your risk stands at 100%, With Middle-priced stocks? 50% ROI with 50% risk and Expensive stocks? 1-10% ROI with 1-10% risk.
(This can be determined by the stock you bought and at what price the share currently trades on, so this mean? the higher the share price, the lower the risk and the lower the return but better chances of receiving dividends compared to a cheap stock which MAY not pay dividends but in actual fact give greater ROI but associated with greater risks)
Note that the above-provided figures are a personal opinion based on the number of stocks observed, what makes this more interesting is that these can be changed based on company performance, corporate action and market growth so yes, it’s also possible to get 50% or more from an expensive stock although on rear occasions but it’s possible so...
But what's important particularly for small/retail investors is that you want growth and where can you find growth? Well, I simple English, whatever is cheap and small has potential to grow or improve compared to what’s already well established. But remember! RED LIGHT! RISKS INVOLVED!
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So, what do you want and what do you really want to achieve?
If you a person who wants to have great growth in your investment portfolio then “Cheap stocks” (Penny Stocks) would be your way to go as you can get more than 10% to 100% sometimes more on your investment for every 1c to 10c increase in the share price sometimes more depending on the share price, this is where retail/small investors may benefit from this.
And if you in the bracket of working/middle class, just want to generate an extra income then middle-priced stocks would be your place, after all, you just want to see a small growth in your salary so that's a good go zone for you with minimal risk.
So, what about Expensive Stocks?
I’d personally first ask How old are you and how much are you investing or earning?
Why am I even asking this?
Well firstly what's the point of investing R1000 in a large-cap or rather expensive stocks when you know your, let’s say, 6-month returns maybe 10% and with a total dividend of R5.
Personally, for me, I'd say Expensive stocks are for institutional investors or wealthy investors, Why? Think of it 10% of R1 Million is R100 000 and the dividend yield pay-out of 1% is R10 000.
The ROI and dividends pay-out do not make much of a difference to a small investor but well for one you at least have fewer things to worry about.
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What are Dividends and ROI?
Return on Investment (ROI) is the capital gain you get on your initial value of an investment.
How does this work in shares? When you buy a share at a certain price and the share price rises, before you sell, you can consider that as the value gain on your total amount of shares in your holding,
Do you need to reinvest? NO that is the share price of your holding increasing and this ONLY becomes your PROFIT/ROI once you sell at a certain price higher than yours SO YOU DON’T WANT TO SELL AT A LOSS, well unless there are greater opportunities on the table that will make you regain your losses once you’ve sold.
Dividends? Well, you can for one say, dividends are ROI as you get something back based on your initial investment, so this means that for a specific value in cash or shares for every share you own, this is paid by a company that's in a profitable market position to be able to generate enough revenue to thank shareholders.
Words of wisdom from Cay-Low
So in closing, while the read may have felt long, I hope you benefit from this and have a clear understanding of what stocks can work for who but at the end of the day you can invest in EVERY stock you wish to buy at any price as share prices including fractional shares starting from as little as 1c and note that it's a personal choice on what you want to buy, what you willing to lose to gain a certain "ROI”, this is all determined by ones risk appetite on how much you want to gain and how much you willing to lose.
And remember a Market cap positions are not permanent, what does it mean? A company that's a Small Cap today may become a large Cap in the coming weeks, months or years while the same can happen with a large cap that can become a small cap in days, weeks, months or years as well, this applies to medium cap as well. This is also applicable to share prices as well because of their fluctuation.
And always remember the less the share price/market capitalization is the riskier and more volatility associated with the stock.
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Sources: Cay-Low Mbedzi, Chron.
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