A stock, also known as equity, is a security that represents the fractional ownership of an issuing company. Units of stock are called shares, which entitles the owner to a proportionate share of the corporation’s assets minus its liabilities. It also enables the shareholders to participate in the profits of the company based on the number of shares they own. These profits are usually paid out in the form of dividends. 

Stock is Equity

The reason stocks are considered equities is because the term equity refers to shareholders’ equity which represents the amount of money that would be returned to the company’s shareholders if all the assets were liquidated and all of the company’s liabilities were paid off. The remaining sum would be the equity left over.

Common and Preferred Stock

There are usually two types of stocks which a company issues; common and preferred. Common stock entitles the owner to vote at shareholders’ meetings and receive any dividends that the company issues. Preferred stock doesn’t usually confer voting rights but, instead, include some rights that exceed those of held by common stockholders. Preferred stockholders have preferential rights, in certain conditions, to receive dividends before common stockholders in the event of a corporate liquidation or bankruptcy. 

Stock Exchanges

Stocks are traded publicly primarily on two stock exchanges, i.e., the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ)). For the stock market, 2023 was banner year for the Dow Jones Industrial Average (DJIA), the Standard and Poor’s 500 (S&P 500). There are around 3,000 stocks listed on each exchange.  

Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average (DJIA) is a stock market index consisting of 30 prominent companies listed on the stock exchanges of the United States. Often it is referred to as Dow Jones or simply, the Dow. Different from other stock indices, which use market capitalization, the Dow is price-weighted, which means the sum of the stock prices included in the index are divided by a factor of approximately 0.152, which changes whenever a constituent company undergoes a stock split. 

The DJIA is one of the oldest and most commonly followed equity indexes. First calculated on May 26, 1896, by Charles Dow and named after him and his business associated, statistician Edward Jones. He co-founded both the Dow Jones & Company and The Wall Street Journal (WSJ).

As of this writing, the Dow Jones Industrial Average consists of the following companies with a price weighting as shown below:

Interestingly, all of the stocks listed as part of the Dow Jones Industrial Average are part of the Standard and Poor’s 500 or simply the S&P 500. 

S&P 500

The S&P 500 is a stock market index that tracks the stock performance of about 500 of the largest companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. It includes about 80% of the total market capitalization of U.S. public companies with an aggregate market cap of around $45 trillion. The S&P 500 is a free-float weighted/capitalization-weighted index. 

The S&P 500 Index is also known as a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The index actually includes 503 components because three have two share classes listed. It’s not an exact list of the top 500 U.S. companies by market cap because the index includes other criteria. Nonetheless, the S&P 500 is considered one of the best gauges of prominent American equities’ performance and the stock market overall. 

Not to get too wonky, free-float methodology is a method of calculating the market capitalization of a stock market index’s underlying companies. Using the free-float methodology, market capitalization is calculated by multiplying the equity’s price by the number of shares readily available in the market. Rather than using all of the shares (both active and inactive shares), as would be the case with the full-market capitalization method, the free-float method excludes locked-in shares, such as those held by insiders, promoters, and governments. 

Most institutional investors prefer trading companies with a larger free float because they can buy or sell a large number of shares without having a big impact on the price. The free-float methodology is used by the S&P 500 Index. 

Indexes in the market are usually weighted by either price or market capitalization. In the trading market, very few indexes are price-weighted. The Dow Jones Industrial Average is an example of one of the few price-weighted indexes in the market. The S&P 500 also uses the capitalization-weighted index. 

How Market Capitalization Affects Stock Value

You can determine a company’s value, also known as market capitalization or market cap, by multiplying all of the outstanding shares of stock (or total stock shares issued and available for investing) by the price of a single share. If a company has 1 million shares outstanding and its share price is $15, the market cap or market value is $15 million. 

Stock Categories

A company is measured by its market value. Each company is categorized by the size of its market capitalization. There are six basic stock categories based on market capitalization:

1. Nano Cap (under $50 million)
2. Micro Cap (less than $300 million)
3. Small Cap ($300 million to $2 billion)
4. Mid Cap ($2 billion to $10 billion)
5. Large Cap ($10 billion to $200 billion)
6. Ultra Cap or Mega Cap (more than $200 billion)

Nano cap stocks are generally too small and too speculative for beginning investors. Micro cap stocks are the smallest and riskiest stocks available. Small cap stocks fare better than Micro cap stocks when it comes to survivability. These companies have growth potential which means they have room to grow and to prove themselves. 

Mid cap stocks offer investors a good compromise between small caps and large caps. These stocks have some of the safety of large caps because of their size and proven performance but also have some of the growth potential of small caps.

Large cap is usually the category conservative stock investors gravitate to because they offer steady appreciation with greater safety. The media often refer to large cap stocks as Blue Chips. And, Ultra or Mega cap stocks refer to companies that are the biggest of the bigs. 

The Magnificent Seven

The Magnificent Seven Stocks, as they are called, are all Mega cap stocks. These high-performing and influential companies in the U.S. stock market include: Alphabet Inc. (GOOG), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Meta Platforms Inc. (META), formerly Facebook (FB), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA) and Tesla Motors Inc. (TSLA).