Theoretically and as seen in the global stock market, is divided as large and small stock depending on the market value. The market value, which is the market capitalization and calculated by using the share numbers a company issued and multiplying by per share price. Milestone (2005) provided an example using Exxon Corp, whose shares outstanding is 6.37 billion. And using $60 for the price of a share, the company’s total market capitalization will be summed to $382.2 billion. The calculation of firm’s capitalization, helps to rank and determine their size, which could be small or large. However, one could also use two other ways in separating stocks that are expensive and those inexpensive. And this involves the use of market capitalization, although this is evaluated against the intrinsic value know as annual profits and net assets.” In determining the cost of stock, if it is cheap or expensive, about the intrinsic value. The writer used Exxon Corp’s, market capitalization mentioned above ($382 billion), to the profit per year, which is $27.7 billion.
One will derive the earnings or price to be multiple of 13.8, which could help determine if it’s large or small. Furthermore, multiple can be obtained by the comparison of market capitalization, with the book value otherwise known as net assets. And using the company’s data, this will be $102 billion, with a net assets ratio of 3.8. The calculation we saw, help to determine the nickname that is given to stock, which could be growth or the value. And when a stock is termed growth, or it is high priced, these are termed glamour or large stocks. This is because the investors have high expectations that the earnings will increase over a period of time, based the feel good otherwise known as behavioural finance (Bodie, Kane, and Marcus, 2014). Moreover, the measures described above poses implications for investors. And as a common belief that small company stocks come with a greater return when compared to large ones over an extended period (Jason, 2013). This is attributed to the fact that small institutions have more risk when compared with most major companies. Thus, financial planners request for compensation, by demanding for higher earnings, because of the added risk. And as seen over time that small organization, quickly fail and goes into bankruptcy as Moya (2015) explained. On the other hand, when small organization succeeds, the stock price easily double or triple over a short length of time. For example, evaluate the opening price of the Dubai Park and Resort, Bloomberg (2015) Index shows, the price as almost doubled, under a year of opening. Although, one should note that the Capital Assets Pricing Model (CAPM) and the volatility are always compensated with greater returns. And affirming that small stocks tend to outperform large ones that Lazard (2015) citing Banz (1981) study, questioned the CAPM. In the study assets, the return was explained, by the use of one variable and the systematic risk associated. In the report, the model variable does not take account of the company size, because it could be outperformed. However, an investor needs to bring other risk elements in determining and explaining equity returns.
For example, the return of stock are usually derived, when the economic situation of the world or a country is stable and underperform when economic condition is worsened (Lazard, 2015). Moreover, because small value tends to offer more advantage because it actively helps to diversify portfolio (Frontier, 2007). Since, it is proven that keeping one portfolio is not an effective investment strategy in our current global environment (Matt, 2014). The value premium for smaller stock prices about the book value of the company certainly outperformed those of large enterprises. Although, in Fisher (2014) comparison, the return on investment, from the year 1979 to the year 2014 to evaluate the value and growth of halves the market. The value stock provided the return on investment for investors, for a small and large cap. However, the writer mentioned the return on “small cap value and small cap growth” generated a triple return when evaluated against the Russell index.
One should not forget that the performance, of value stock underperforming and performing, is very dependent on the business cycle, which does not give a clear picture. Fama and French framework for assessing the risk of value premium become the preferable model because the introduced additional factors that affect assets return (Lazard, 2015; Noah, 2015). Noah (2015) mentioned, there is a possibility that the value premium is not caused by risk, however, methodical inefficiencies in the market. And because the relation of performance, of “value and growth stocks are connected to changes in the equity risk premium it makes no sense that the premium value anomaly discovered by researchers should be included in the cost of capital equity calculations” (Jason, 2001). The premium value, variance, are posed by other factors, which includes the systematic return and forecast favouritism in the market for growth and value of a stock. In the United Arab Emirates, the financial market is very young, and most of the investors are targeting the small value growth premia. This is because of the entrant level, is much lower when compared to large. Although, because of the significant operating capital, derived from oil revenue, the monocracy government invests into large value stock overseas and expect returns over an extended period (Reuters, 2014). One of the reasons, why one may say, these sets of individuals in buying large stock and avoid stock perceived as cheap, could be the lack of confidence in small companies’ stability. Although, the growth small cap stocks, as risen over the years, from the evaluation of the global indices as seen below.
Source: Lazard (2014).
However, it is advisable before tilting portfolio to small value direction, an investor should have the logical data and history on the performance of the organization.
Bodie, Z., Kane, A. & Marcus, A.J. (2014) Investments. 10th global ed. Maidenhead: McGrawHill Education.
Bloomberg (2015) Dubai Parks & Resorts PJSC + Watchlist DUBAIPAR:UH [Online] Available: http://www.bloomberg.com/quote/DUBAIPAR:UH [Accessed: November 14, 2015]
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Jason T., (2001) Disentangling value, growth, and the equity risk premium [Online] Available: https://www.finsia.com/docs/defaultsource/jassanew/jassa2001/3_2001_equity_risk.pdf?sfvrsn=6 [Accessed: November 14, 2015]
Lazard (2015) Small Caps, Large Opportunity [Online] Available: http://www.lazardnet.com/us/docs/sp0/14693/SmallCapsLargeOpportunity_LazardInvestmentFocus.pdf?pagename=Investment+Focus[Accessed: November 14, 2015]
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Matt k., (2014) Buy and hold’ investors: You’re doing it wrong [Online] Available: http://americasmarkets.usatoday.com/2014/09/12/avoidthese5buyandholdblunders/ [Accessed: November 14, 2015]
Noah S., (2015) Busting some myths about value premiums [Online] Available: http://gulfnews.com/business/analysis/bustingsomemythsaboutvaluepremiums1.1619196 [Accessed: November 14, 2015]
Reuters., (2014) Middle East funds see value in popular Saudi stock market [Online] Available: http://www.thenational.ae/business/markets/middle-east-funds-see-value-in-popular-saudi-stock-market [Accessed: November 14, 2015]