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For successful investing, it’s important to notice the larger trends taking place in the financial markets. In November, for example, small cap growth funds performed better than other types of stock funds. While one month does not a trend make, it is a long enough time for individual investors to take notice. The lingo of “small cap growth fund” may sound intimidating, so let me expand on this phrase so you can see how simple it really is, and then I’ll get back to why it matters.
One of two major categories of the stock market is company size, which is referred to as capitalization, or “cap”, for short. Small cap, then, just refers to the smaller companies in the stock market. The major categories are the same as tee shirt sizes: small, medium (mid cap) and large. Ok, that’s simple enough.
The other major category relates to how stocks are valued. Growth stocks are more like merchandise at fully priced retailers like Nordstrom’s or Neiman Marcus. You are paying a little more, but you know you will be dressed in the latest and upcoming trends. On the other hand, value stocks are like merchandise at discount retailers, like TJ Maxx, or Nordstrom Rack, where you are able to buy things at a lower price because something negative has made it cheaper, however minor it may be. So, basically, value stocks are discounted, while growth stocks are fully or overvalued.
The importance of all of this is that investors buy riskier, smaller companies, or small cap growth stocks, during the early stages of a bull market. This is somewhat perplexing, because the bull market has been roaring since March 2009 when the stock market bottomed. What I have learned is that the actions of the market don’t always make sense, but the actions do show you where money is flowing. And there are usually opportunities to make more money by following where money is flowing, especially at the early stages.
Financial Woman’s 7 Steps to Deliberate Investing course covers the trends and market categories in detail, and is available at financialwoman.com, if you want to learn more. An understanding of the major market categories will increase your skills as an investor, whether you self-manage or work with a financial advisor. Increased skills around your money simply lead to reaching your financial goals sooner.
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