Those with limited knowledge on an Investment Style Box may not realize just how much information can be conveyed through this seemingly insignificant tic-tac-toe board.
John Ben Brazier
Nov. 14th, 2019
Even the most novice of investors have likely seen the ever popular “style box”. While self-explanatory to a seasoned veteran of the investment world, those with limited knowledge of the subject may not realize just how much information can be conveyed through this seemingly insignificant tic-tac-toe board.
The left side shows market capitalization, or market cap for short. Market cap is calculated by multiplying the price of 1 share of the company’s stock by the number of shares outstanding. This is a very simple way of calculating how large a company is.
Small cap companies are companies that have a market capitalization of $250 million to $2 billion and are generally viewed as having more risk than the other levels.
Mid cap companies are anywhere from $2-$10 billion.
Large cap companies fall between $10 and $100 billion and are traditionally thought to be less risky than small or mid cap.
The top shows the “type” of company.
Value companies are companies that trade at a lower price than what they’re fundamentally worth. The idea is that the investor benefits if/when other investors recognize the company’s true value. As it can take some time for a company to “turn around”, these are typically seen as longer-term investments.
Growth companies are companies that typically trade above what they’re fundamentally worth – with high price to earnings ratios – and the intentions to continue to grow faster than similar companies. With prices of growth companies typically being above their relative value, bad news about a company can be incredibly detrimental which is why it is often said that growth companies tend to be considered more volatile.
With that said, blend is a mixture of value and growth characteristics.
The style box is a great way to get to know a company at a very broad level, however, it must be noted that investment decisions should never be made just because a portfolio is lacking weight in small cap growth and “X” company fits into that category – proper due diligence is always important.
Hope you find this educational and helps you to organize your financial life.
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