How to Create a Stocks Portfolio (Part 2)

January 31, 2019

A Volatile Week Comes to an End

How to Create a Stocks Portfolio (Part 2)

In the previous article, we learned to create a stocks portfolio using the correlation between a commodity with a stock group. In this article, we will talk about how we can use the Market Capitalisation of a company to create a portfolio.

The Market Capitalisation

The company’s market capitalisation, or as well known as Market Cap, corresponds to the measure of the company’s size. The measure allows to understand and compare the size of different companies.
 
Market Cap is the result of the multiplication between the shares outstanding and the share price. For example, consider Alcoa Corp (AA) listed on S&P 500. AA has 186.00M shares outstanding and the last close is $28.75. In consequence, the AA market cap is $5,347.5M or $5.35B.
 
Depending on the Market Cap value, the company we can classify on:
  • Small-cap: if the company’s market value is between $300M to $2B.
  • Mid-cap: the value moves between $2B and $10B.
  • Large-cap: the market cap is greater than $10B.

Using the Market Cap to measure the risk

Considering the investment risk, it tends to decrease in the way that the market cap increases.
  • Small-cap are young companies, they have the most aggressive risk and the biggest growth potential compared with mid and large-cap. Small-cap companies are more attractive to investors who have not a big capital account to create his portfolio.
  • Mid-cap companies have a major potential for growth. Also, these companies have a lower risk of bankruptcy compared with the small-caps. In consequence, the risk/reward relation in this group is lower than the smaller companies.
  • Large-caps are the big companies with consistent performance and a solid market position. The lower risk of the large-cap group, makes it consider as conservative stocks.

Creating the Portfolio

Now that we can categorise each company for its capitalisation, we will create a conservative portfolio using as a tool the Google Sheets app.

In this case, we consider the Exchange-Traded Fund (ETF) XLF – Financial Select Sector SPDR Fund compounded by 77 stocks. XLF contains, for example, Berkshire Hathaway Inc (BRK.B), JP Morgan Chase & Co (JPM), Bank of America (BAC), Wells Fargo & Co (WFX), Citigroup (C), and others. The criteria that we will use is the market cap greater than $100B. Finally, the portfolio proposed is:

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