market capitalization

7 Ways to Compare Stock Market Investments

Tim Lemke — Mon, 23 Apr 2018 08:30:09 +0000

When investing, we are faced with an overwhelming menu of things to choose from. There are tens of thousands of stocks, a mind-boggling number of mutual funds and ETFs, plus a dizzying array of bonds. How can we make sense of any of this to decide what makes a good investment?

It helps to know the basic elements of an investment so you know how to compare one product to another. This may require some work, but it can often be fun to dig into the details of why one investment is better than another. Here are some key things to examine.

1. Growth potential

Most people that are far away from retirement age seek investments that will grow over time. Ideally, they're looking for investments that will allow them to build a sizable retirement fund and outpace the returns offered by a basic bank account. There are some investments, such as stocks, that historically rise in value and are great for younger investors. Mutual funds and ETFs can offer solid growth as well. Bonds, however, are more likely to offer lower, but more stable returns.

As you become savvier in grasping the inner workings of specific investments, you can become skilled at knowing when an investment is undervalued and perhaps poised for big growth — or overvalued and ready for a price decline. Understanding the growth potential in certain investments can help you find the right mix for your individual portfolio. (See also: 9 Ways to Tell If a Stock Is Worth Buying)

2. Sector and industry

If you don't know a lot about a stock investment at first, it helps to learn what the company does to make its money. Companies are grouped into sectors based on the type of business they operate in; within sectors, there are smaller segments called industries. Typically, stocks are grouped into 11 different sectors — including health care, financials, energy, and consumer staples, to name a few — and there can be anywhere from two to 15 industries in each sector. A well-balanced stock portfolio will have some exposure to all of these sectors and as many of these industries as possible.

When investing, it helps to learn how these sectors perform compared to the broader stock market. Some sectors perform better than the market, while others underperform. Some are resilient in tough economic times, while others are more vulnerable to bad news. Understanding these industries can help you make smart comparisons when evaluating stocks.

3. Market capitalization and asset class

Stocks are usually categorized by size, also referred to as market capitalization. A company's market capitalization, or market cap, refers to the value of all outstanding shares (which is its stock price multiplied by the total number of shares outstanding).

There are large-cap stocks, which comprise the largest publicly traded companies. There are mid-cap stocks, which are medium-sized firms. And there are small-cap and even micro-cap stocks, comprising smaller companies. These categories are also called asset classes.

Generally speaking, large-cap stocks offer solid, steady growth potential for shareholders. Shares of smaller companies can offer bigger returns, but may also be riskier investments. Understanding the unique characteristics of stocks in each asset class can help you make comparisons between investments and find stocks that make sense for your financial goals.

4. Risk and volatility

Stocks of smaller companies can be riskier than some other investments. Understanding risk — and your own tolerance for it — can help you compare investments with confidence.

It's important to note that the potential for higher returns comes with the potential for higher risk. Finding that risk-reward sweet spot is the key to successful investing. Too much risk can result in you losing a lot of money. Avoiding risk altogether may prevent you from getting the returns needed to reach your financial goals.

Volatility and risk go hand in hand. When an investment goes up and down in value rapidly, we often say it's a volatile investment. There are ways to make money off that volatility, but for most investors, it's best to see steadier, consistent returns. (See also: How the Risk Averse Can Get Into the Stock Market)

5. Earnings, and earnings per share

Companies make money. They also spend it. When companies make more money than they spend, that's usually a good thing for everyone, including investors. This extra money is often referred to as net earnings. And as an investor, you want to see earnings increase over time.

When comparing two companies in the same industry, it can help to examine earnings to see which may be doing better financially. But it's also important to look at earnings in the context of a company's size. To do this, simply take the earnings total and divide it by the number of shares outstanding. So, a company with $9 million in earnings and 20 million shares would have earnings per share of 45 cents. (See also: Beginner's Guide to Reading a Stock Table)

6. Financial news

Sometimes, just paying attention to the headlines can help you grasp whether an investment is a good one or not. Financial news can let you know of macroeconomic trends that may help or hurt certain investments, and update you on specific news regarding companies or products. When trying to decide between investments, do a quick news search to see if there's anything big you need to know. You don't have to go overboard; you can overwhelm yourself reading financial magazines and watching CNBC all day. But staying generally informed can certainly be helpful.

7. Dividends and dividend yields

Many companies choose to distribute earnings to shareholders on a quarterly basis. This is great if you are a shareholder, because it's free income just for owning shares. When examining dividends, you should look at both the amount of the dividend and the "yield," which is the amount when compared to the share price.

For example, a company may pay shareholders 50 cents per share they own every quarter. That's the dividend yield. If shares of the company are priced at $35, the yield is about 1.4 percent per quarter, or 5.6 percent annually. When examining dividends, look to see if a company has a history of maintaining or even increasing dividends each year. If they do, that's a sign of a company on strong financial footing.

Keep in mind that if a company doesn't distribute dividends, that's not necessarily a bad thing. Many fast-growing companies choose to instead reinvest their earnings into business operations, and this can often help boost growth and make the company more valuable over time. Amazon may be the best example of a strong company that does not pay dividends.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Questions to Ask Before Buying Any Stock

Tim Lemke — Tue, 30 Jan 2018 09:30:08 +0000

At last count, there were nearly 4,000 publicly traded companies in the United States. That's a lot to choose from if you are an investor, so figuring out what stocks to buy can feel overwhelming.

Before investing your hard-earned money into shares of a company, it's best to ask the right questions. Doing so could be the difference between owning a profitable investment or a bust. Here are some key questions to ask before making a stock purchase.

1. What does the company do?

This should be your very first question when buying a stock. It seems obvious, but sometimes people are so wowed by the buzz surrounding a company that they don't figure out the basics. if you plan to own shares of a company, you should have an idea of how it makes its money. If you don't have a good sense of the company's business model, how can you evaluate whether it's a good investment or not?

Usually, you can get a solid understanding of a company by doing a modest amount of research. But there are some companies that are extraordinarily complex, and others that are even cagey about how they get revenue. If faced with one of these companies, it's probably best to hold off on buying shares.

In fact, companies that have been opaque about how they earn money have proved to be some of the biggest busts in stock market history. Enron is perhaps the best example of this. (See also: 4 Quick Ways to Decide If a Company Is Worth Your Investment)

2. What are the company's revenues and earnings?

There are many factors that drive a company's stock price, but one of the most important things is its financial performance. The two key figures to know are revenue — how much money the company brings in — and earnings, which is another term for profit. The higher these numbers, the better, but it's important to not analyze revenues and earnings in a vacuum. Compare these numbers to figures from the previous quarter and the same quarter a year prior. Also compare their performance to competitors in the industry.

Additionally, investors should not only look at total earnings, but earnings per share, or EPS. So for example, if a company had $20 million in earnings and has 10 million shares, the earnings per share would be $2. Again, look at what's normal for the industry, and compare that to the EPS of the company you're considering investing in.

Examining revenues and earnings will give you a good sense of the financial health of the company, and whether it's worth investing in.

3. What is its historical performance?

While it is true that past performance does not necessarily predict future returns, a long track record of good returns is a positive indicator for most stocks. If you come across a stock that has decades of consistent, solid returns, you can buy shares with some degree of confidence. A stock with a shorter track record of success may bring greater risk and uncertainty to investors.

When evaluating a stock, take a look at the returns over the previous five- and 10-year periods. Go back even further if possible. Anything less than three years is not a large enough sample size to draw a good conclusion. (See also: 9 Ways to Tell If a Stock is Worth Buying)

4. Does it pay a dividend?

Many companies choose to distribute a portion of their earnings to shareholders each quarter. These quarterly payments are called dividends, and they can be a powerful source of passive income for many investors. Healthy companies are able and willing to pay sizable dividends to shareholders, though some choose to keep their cash and reinvest it instead. Amazon is one example of a strong company that chooses to focus on growth rather than pay dividends.

Generally speaking, companies that pay out hefty dividends tend to be more stable but don't grow as quickly. Utility companies usually fall into this category. If you are closer to retirement, you may wish to have more dividend stocks in your portfolio to protect your savings and replace income when you retire. If you are further away from retirement, you may be more inclined to eschew dividend stocks in favor of those that are more focused on growth.

5. What is its price-to-earnings ratio?

It's not easy to figure out whether a company's stock price is too high or too low. One helpful indicator, however, is the ratio of the stock price relative to its earnings per share. There is no magic ratio to look for, but you ideally want to avoid price-to-earnings ratios that are too high, because it could mean a stock is overpriced. Good P/E ratios can vary by industry; a growing tech company can have a P/E ratio over 20 and be sensibly priced, while a manufacturer may be overpriced with a ratio of 10.

If you are researching a stock, take a look the P/E ratios of competitors in the same industry and the market overall. You may find a bargain stock, or determine that the shares you were poised to buy are too pricey. (See also: Make Smarter Investments by Mastering This Simple Ratio)

6. What is its market capitalization?

Market capitalization is just a fancy term for size. It's the value of all the company's outstanding shares multiplied by the share price. So, a company with 10 million shares that sell for $100 each would have a market capitalization of $1 billion.

Large-cap companies generally have market capitalizations of $10 billion or more. Mid-cap stocks have market capitalizations of $2 billion to $10 billion and small caps have market capitalizations of $300,000 to $2 billion.

A well-rounded stock portfolio should have a good mix of larger companies with small and medium-sized firms as well. Larger companies tend to have more stable stocks, which are good for longer-term investing. Small companies, particularly in sectors like technology, can have higher returns in the short-term but may be more volatile. Understanding a company's size will help you grasp a stock's growth potential.

7. Does it operate domestically and internationally?

When researching a stock, it's helpful to get an understanding of where, geographically, the company gets its revenues. If a company has growing overseas operations, this can give you an idea of whether there is room for growth. After all, the U.S. makes up only about 5 percent of the world's population.

A well-diversified portfolio should include some exposure to international markets. And if you own shares of U.S.-based companies with big overseas operations, you may not need to invest directly into international firms that you may not be as familiar with.

8. Does the company have a "moat?"

Warren Buffett, one of the world's most successful investors, often speaks of a company's "moat." What is a moat? Well, we think of it as a body of water that protects a medieval castle, but in investing terms, it's anything that gives a company a competitive advantage and cushion to survive challenging times. A company like Walmart, for example, can thrive in both good economic times and in bad because it sells products with low prices. Facebook is another company with a wide moat, due to its massive edge in users over other social media companies.

When considering a stock, understand that the larger the moat, the more resilient the company. And that's great for investors.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Beginner's Guide to Reading a Stock Table

Damian Davila — Wed, 21 Sep 2016 10:30:10 +0000

If you've thought about investing, you've undoubtedly considered stocks. And for good reason: During the period of 1928—2015, the Standard & Poor's 500 index averaged an annual return of 11.25%.

But getting started can be confusing, and even making sense of stock tables and the information in all the columns can be daunting.

Fear not, however — here's a basic primer for novice investors on how to read stock tables and better understand the information in each column. (See also: How to Buy Your First Stock(s) or Fund(s))

Let's Imagine That You Search for Apple Stock

Given that Apple Inc. [Nasdaq: AAPL] is currently the publicly-traded company with the largest market capitalization, at some point you'll probably want to learn more about its stock price.

If you were to start researching Apple's stock, you might find something like this on Yahoo! Finance:

First, take note of the market in which the public company trades, since it'll yield important clues about the stock. For example, Apple trades in the NASDAQ, which is an electronic marketplace for buying and selling securities mostly in the U.S. technology sector. On the other hand, more traditional companies like General Electric Company, Wal-Mart Stores, Inc., and Target Corporation trade on the New York Stock Exchange (NYSE). And keep an eye out for stocks traded on foreign exchanges. Some investment accounts may limit you to only stocks traded on U.S.-based exchanges or charge you high fees to invest in foreign stocks.

Let's break down the meaning of these numbers.

Key Measures of Stock Price

On the left side of the summary table of our example, you'll find a list of key measures of the stock price. Let's review these measures, starting from the top.

Open Price and Previous Close

This the price at which a stock first trades upon the opening of an exchange on a given trading day. Both Nasdaq and the NYSE open at 9:30 a.m. Eastern Standard Time.

The previous close is the final price at which a security is traded on a given trading day. If the opening price is dramatically different from the previous closing price, you have a signal that investors reacted to an important piece of news, such as an earnings call, industry regulation, or a downgrade or upgrade from an investment firm.

Bid and Ask

The bid is the price in the market to buy a stock, while the ask is the price a seller in the market is willing to accept. The difference between the bid and ask price is a measure (referred to as "spread") of the demand and supply for stock. The smaller the spread, the easier and faster is to conduct a sale or purchase of a stock. Given a bid-ask spread of just $0.05, your transaction order for Apple stock would be cleared quickly.

The number following the bid or ask price represent the number of pending trades in lots of 100 at the given bid and ask price. In this example, there were 10,000 pending purchase orders at $107.70 per share and 30,000 pending sale orders at $107.75 shares. Any pending orders that aren't processed on the same trading day are carried on to the next one.

Day's Range, 52-Week Range, and One-Year Target Estimate

These figures provide an idea of the volatility of a stock price. While the 52-week range gives you the minimum and maximum price of Apple stock during a trailing 52-week period, the day's range gives you the same values for the most current trading day.

In our example, Apple stock is currently trading below its 52-week high. Given that the consensus among analysts is that the one-year target estimate price of Apple stock is $124.11, the price of Apple stock appears to have upside potential (it's price will go up). Keep in mind that this is just a consensus of estimates, meaning that different analysts may have different targets and that all of these numbers are just predictions. In the stock market, anything can happen!

Paying attention to the price volatility of any stock's price is important to put those ups and downs in context.

Now let's take a look at the right side of this stock table. The next set of measures are a bit more advanced, but they are also useful even to the newbie investor.

Market Capitalization

Also referred to as "market cap," this is the total dollar market value of a company's outstanding shares. This value changes constantly and is often used to rank the size of publicly-traded companies. On this date, Apple stock still held onto the number one spot on the list of companies ranked by market capitalization.

P/E Ratio

P/E ratio is short for price-earnings ratio and is calculated by dividing a stock's current share price by its earnings per share (EPS) for the last trailing 12 months (TTM). The P/E ratio provides you a guide as to how much you can expect to invest in a company in order to receive one dollar of that company's earnings. In our example, you can expect to pay $12.56 to get a $1 in return for investing in Apple.

By following the investing maxim "buy low and sell high," you would want to buy stocks when P/E ratios are low and sell when P/E ratios are high. Still, there are stocks with low P/E ratios that have tanked even more and stocks with high P/E ratios that have turned out to be great investments.

Beta

This is a measure of volatility of the stock price compared to that of the market. The market has a beta of 1.0, so stocks with a beta below that benchmark move less than the market and stocks with a beta above that benchmark move more than the market.

Given the beta of 1.38, the price of Apple stock fluctuates a bit more than that of the market, meaning that you can't expect wild fluctuations. If the market were to tick up a bit, you would expect this stock to tick up just a bit more, and vice-versa.

Generally, investors with very low tolerance to risk avoid stocks with high beta. Otherwise, those investors could end up with too many sleepless nights.

Volume and Average Volume (Three Months)

The volume tracks the total number of transactions for the stock for a trading day. The average volume tracks the average number of transactions per day within a specified period, such as three months in this example. A high trading volume indicates that a stock is very liquid (transactions clear quickly).

Dividend and Yield

The dividend indicates the annual dividend payment per share and its yield indicates the percentage return on the dividend (annual dividends per share divided by price per share). When the stock table provides no dividend and yield numbers, the company doesn't currently pay out dividends.

Earnings Date

This is the date on which you can expect the company to release an official public statement of a company's profitability for a specific time period, typically a quarter (Form 10-Q) or a year (Form 10-K). Expect analysts to release their own estimates of those numbers close to that date and correct those estimates shortly after the official statement from the publicly traded company.

Depending on the nature of the announcements made on an earnings date, you can expect a small or big reaction from the stock market and a reflection of that reaction in the price of a stock.

The Bottom Line

You can find stock tables both in print and online. This guide is a useful primer to interpret the data. Keep in mind that printed stock tables may not include all of this data. Another advantage of searching stock tables online is that you will access the latest information. Still, stock tables available in yesterday's newspaper are still useful to have a snapshot of how your equities are performing. Warren Buffett said it best: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." (See also: The 5 Best Pieces of Financial Wisdom From Warren Buffett)

To buy or sell a stock, always check against your holding period, tolerance to risk, target investment fee for a period, and overall retirement strategy.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Ways to Tell If a Stock is Worth Buying

Tim Lemke — Fri, 12 Aug 2016 09:00:15 +0000

One of the most effective ways a person can build wealth over the long term is by investing in stocks.

When you own a share of stock, you own a portion of a public company. And when those companies do well, investors make money. In fact, stocks are considered essential for those looking to save for retirement or achieve other long-term financial goals.

It's possible to invest in groups of stocks through vehicles such as mutual funds or exchange traded funds. But you may also want to consider investing in shares of individual companies. There are more than 4,000 companies that are publicly traded on America's two largest stock exchanges.

But how do you know if a stock is worth investing in? What makes a stock good or bad? Here are nine things to consider.

1. Price

The first and most obvious thing to look at with a stock is the price. How much will it cost to buy a share of this company?

Now, it's important to note that prices should only be viewed in context. Many companies will "split" shares once they reach a certain level, thus reducing the price but increasing the number of shares available. Other companies never split, so a single share could go for several hundred dollars or more. But the price — especially when matched against historical prices — will determine how many shares you can purchase with the money you have. When you evaluate stocks, knowing the price of shares and their history will help you determine if you're getting a good value when buying.

2. Revenue Growth

Share prices generally only go up if a company is growing. And one of the few ways a company can grow is by increasing its revenue. Revenue is often referred to as the "top line," and it's a major indicator of whether a company has been successful. It's important to not look at revenue in a vacuum. Instead, look at the increase or decrease in revenue from one quarter to the next and one year to the next. A positive trendline bodes well for the stock price, but if revenue is flat or declining, it's important to find out why before investing.

3. Earnings Per Share

How much money does the company have leftover at the end of each quarter? Take that figure, divide it by the number of shares it has sold, and you get the earnings per share number, or EPS. For example, if a company made $40 million in profits last year and has 24 million shares, the EPS is $1.66.

EPS can be a driver of stock prices, as investors generally don't want to overpay for a stock. Generally, the higher the EPS, the better shape the company is in. But there is often debate about the best range for EPS, and companies can manipulate it by buying back shares, thus boosting EPS without actually increasing profits.

4. Dividend and Dividend Yield

Many companies will return a portion of their earnings to shareholders. Investors can get a small payment for every share they own, known as a dividend. Many healthy companies will issue good dividends each quarter and the revenue from this may outpace the interest you would get from a normal bank account. Thus, dividend stocks are popular among investors looking for additional income, as well as share growth.

It's easy to search for companies with the highest dividends, and you can also search for dividend yield, which is the dividend divided by the share price. If a company has maintained or raised its dividend, that's a sign that it's on strong footing. A cut to dividends is often a bad sign.

Some of the most well-regarded public companies have been designated as "Dividend Aristocrats" for distributing and increasing their dividend for at least 25 consecutive years.

It's worth noting that many good companies do not distribute dividends because they prefer to invest the cash back into the business. (Amazon is one high-profile example.) And many companies, such as utilities, offer dividends because they can't offer great growth in share value.

5. Market Capitalization

Bigger is not always best, but if you are looking to invest in a stock that will give you steady growth without a lot of volatility, the largest companies are often your best bet. A company's market cap is essentially the value of all its shares. Companies with large market caps are often large and diversified enough to avoid being affected by a single piece of bad news. Think of behemoths like Procter & Gamble, Coca-Cola, or ExxonMobil — good, solid companies that have offered decades of solid returns.

6. Historical Prices

All companies go through rough patches. But if you are investing for the long term, you need to do more than look at a single company earnings report or current price performance. Looking at five-year, 10-year, and even 15-year returns will give you a sense of whether a company can withstand tough stretches. Historical returns are not a guarantee of future performance, but can at minimum be illustrative.

7. Analyst Reports

Many brokerages and investment banks have a staff of research analysts that issue reports and recommendations about individual stocks. Often, these reports come with "buy" or "sell" ratings, based on the analysts' judgment of a company's share price and finances. It's important to note that analysts often disagree, so it's best not to rely on a single report before choosing whether to invest.

8. The Industry

It's usually important to examine not just a stock, but the industry that the company operates in. By doing this, you may get an understanding of whether a certain type of business or sector is struggling or doing well. For instance, when evaluating a company such as McDonald's, you'll want to look at the entire fast food and restaurant sector to gain an understanding of how Americans are eating out. Looking at a stock in this context will help you understand if there are positive or negative influences that may not be immediately reflected on a company's share price or balance sheet.

9. Major Economic Indicators

No matter how hard it tries, a company can't control every single thing that might impact business. The broader economy of the nation and the world can play an outsized role in the health of a company and its share performance. Things like consumer prices, the unemployment rate, or changes to interest rates can impact how a company is doing independent of its own business. While the stock market and economy are two separate things, they are very much linked. For the most part, when the economy is doing well, companies are doing well and share growth comes with that. Likewise, share prices can lag during slow economic times or times of economic uncertainty.

Anything we've overlooked? What do you look at when you evaluate a stock?

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Find the Investing Style That's Right for You

Andrea Cannon — Tue, 05 Jan 2016 14:00:03 +0000

No matter how carefully you invest, there will always be some level of risk involved. But by choosing an investing style that works for your risk/reward preferences, age, and investment timeline, you can help manage how well your investment portfolio will perform.

We've created this primer on investing strategies to help you better understand which investing style may be right for you.

Active vs. Passive

How determined are you to outperform the market? This will help you answer the question of whether you prefer an active vs. passive investment strategy.

Active

An active investor generally wants to exceed the performance of a benchmark index (such as the S&P 500). They're typically more aggressive and willing to accept more risk for potential greater reward.

Thus, they either trade more frequently, or choose to invest in actively managed funds featuring portfolio managers who are consistently trading and working to increase investor returns. This means that actively managed funds typically charge higher fees than passively managed funds, since the costs of more frequent trades, staff, and other needs add up. Keep in mind, however, that research indicates few active traders or fund managers beat the market consistently.

Passive

A passive investor is typically less concerned about outperforming the market. Instead, they simply want to achieve returns that match their benchmark index. Why would anyone not try to beat the market, you might ask? For starters, it's nearly impossible to do so on a consistent basis, which means your returns might suffer. And active investing incurs more fees, further eroding the returns on your money.

For this reason, passively managed funds tend to be more affordable — they don't require a full-time team of researchers, nor are they placing frequent trades. Most experts suggest that for most investors, passive investing generates the greatest returns over time.

Growth vs. Value

Both growth and value investing strategies focus on choosing stocks that provide the best possible returns. However, their underlying philosophies and approaches differ significantly.

Growth

Growth investing focuses on companies with faster than average projected growth (better known as "growth stocks"). In most cases, these companies are growing very quickly and reinvesting most of their earnings back into the business to encourage continued future growth. They tend to have higher price-to-earnings ratios, making them more expensive than value stocks.

The benefit of investing in growth funds is they have a greater potential for higher returns, but consider that this also means that you are willing to accept more risk. This means that when stock prices are rising, you will likely do better than the overall market, and when stock prices are falling, you will likely do worse. But if you are willing to accept higher risk for potentially greater returns, than growth funds may be right for you.

Value

Value investing focuses on companies whose stock prices don't necessarily reflect their worth. There are a number of reasons why these stocks may be undervalued (such as negative publicity or lower-than-projected earnings), and you may be able to benefit from this. In order to find these types of funds, investors will look for a security that has been discounted so much that its market value is less than its intrinsic value.

Value funds tend to be safer than growth funds and generally have the potential for both current income (such as dividends) as well as long-term appreciation. These types of funds are ideal for risk-averse investors.

Blend

Blended funds invest in both growth and value stocks. This is ideal if you are willing to accept some risk and want to invest in growth companies, but also want to enjoy the lower price-to-earnings and price-to-growth ratios of value companies.

Market Capitalization Matters, Too

Have you ever wondered what the difference is between large value funds and small value funds? This has to do with market capitalization (or the size of the companies in which the fund invests). Market capitalization classes are defined as follows:

Large-cap companies have a total share value over $10 billion
Mid-cap companies have a total share value between $2 billion–$10 billion
Small-cap companies are those with a total share value under $2 billion

In most cases, more risk-averse investors will want to look for dependable large-cap stocks or stock funds, such as industrial stalwarts like Coca-Cola or IBM. Small-cap stocks or funds tend to have more risk, but also the potential for greater returns.

If you're still learning about investing, do your research. There are various online financial tools that can help you determine which investment strategy and types of funds are right for you. Most investing experts would agree that you should naturally reduce your investment risk tolerance as you age so that you aren't left with high risk investments right before retirement. Your needs — and investing style — may change over time, so re-assess your portfolio and investment style as your financial picture evolves. (See also: 8 Steps to Starting a Retirement Plan in Your 30s).

For more information and specific investment and asset allocation advice, consider consulting with a financial planner.

Do you have other tips for choosing the right investing style? Please share your thoughts in the comments!

This article is from Andrea Cannon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: