What Are Chips, Caps, and Sectors in the World of Corporate Finance?
You may hear a lot of talk about different types of chips, caps, and sectors when stocks get brought up in financial conversations. These terms are all just different ways of classifying and lumping together different types of stocks and their underlying companies.
A cap, for instance, just refers to the size of the company in terms of its total value. The different sectors refer to the types of industries in which corporations operate. Chips . . . well, they can mean a variety of things depending on the type of chip you’re talking about.
A single company can be classified in several different ways. For example, Bank of America would be a blue chip stock, a large cap company, and in the financial sector. So, each term represents a classification of several different companies grouped together by similar traits.
This metaphor originally referred to the different colored chips in a casino. Blue chips had the highest value, so the term blue chip was used to refer to the highest value companies. Since then, other chips have been introduced that have very different meanings, making the entire metaphor nonsense. Oh well.
There’s really no good way to summarize the chips anymore, so I just dive into what each one means:
Blue chip: Large, highly valued corporations able to easily withstand market shocks and fluctuations; safe corporations for investing with limited risk but also with limited growth potential
Green chip: Corporations that work in green energy, sustainable products and services, or whose primary operations are otherwise associated with environmentalism
Red chip: Any Chinese corporation listed in an exchange outside of China
Purple chip: Blue chip + red chip = purple chip (Investors know color theory!)
P chip: Chinese corporations listed in Hong Kong
S chip: Chinese corporations listed on the Singapore Exchange
A corporation’s cap refers to its market capitalization, which is the total market value of all outstanding shares of stock. Corporations are categorized by their total value into five primary categories:
Large cap: Have total market capitalization of $10 billion or more
Mid cap: Have total market capitalization between $2 billion and $10 billion
Small cap: Have total market capitalization of less than $2 billion
Micro cap: Have total market capitalization between $50 million and $200 million
Nano cap: Have total market capitalization of less than $50 million
Market capitalization is actually a very easy thing to calculate. All you do is multiply the number of shares outstanding by the market price per share. So if a corporation has 100 million shares outstanding and each share sells for $20, then the calculation looks like this: 100,000,000 x $20 = $2 billion. In this example, the corporation would be a mid cap stock.
The market capitalization for corporations is actually very closely watched because it’s often used as a quick reference point for the amount of potential risk and return associated with a corporation. The larger a corporation’s market capitalization, the more likely it is to be viewed as a lower-risk stock that will sustain its value and even possibly pay dividends, although it will never be a fast-growing stock.
Smaller market cap companies tend to be higher risk and are less likely to pay dividends, but also have greater potential for fast growth.
Another quasi-classification of market capitalization is the penny stock. There’s no single definition for what classifies a penny stock.
Depending on who you talk to, it’s either a stock that sells for less than one penny per share, a stock that sells for less than one dollar per share, a stock that sells for less than five dollars per share, any company in the micro or nano cap range, or any stock that’s not traded on a major exchange.
That being said, penny stocks tend to be the smallest, most volatile, and riskiest of all stocks. They’re very attractive to some people because penny stocks also have the most potential for growth, in those extremely rare instances when one actually succeeds.
These stocks also tend to be very volatile, changing in value by several hundred or thousand percent in a single day, giving them some potential for people attempting to take advantage of interval trading.
The sector in which a corporation operates refers to its primary industry. Different sectors respond differently to external economic conditions, seasonal trends, and other variables, so knowing which sector a corporation operates in, as well as the variables that influence the price and performance of the corporations within that sector, can be helpful.
Here’s a list of some of the most commonly cited sectors, with examples of the products or services available from that sector:
Consumer discretionary: Sex, drugs, and rock ’n’ roll (fashion, booze, media, and so on)
Consumer staples: Soups, soaps, cereals, and so forth
Energy: Petroleum, biofuels, wind power, solar power, nuclear power, coal, and so on
Financial: All financial institutions
Healthcare: Doctors, hospitals, lab work, and other medical services
Hospitality: Hotels, restaurants, tourism, and so forth
Industrial: Metal work, machining, and other manufacturing
Infrastructure: Major construction work, such as roads, bridges, high rises, and so on
Pharmaceutical: Medicine and related products
Tech: Computers, robotics, engineering, research, and so forth
Telecom: Anything related to phones and Internet services