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Trade like a stock market wizard

Categories, Industry Groups And Catalysts

A good way to gain perspective and regulate your thoughts about a particular stock is to categorise companies. It will help you ascertain the type of company you’re considering so that you get an idea about where the stock is in its maturation cycle.


They normally tend to fall into one of the following six categories:

  • Market leaders
  • Top competitors
  • Institutional favourites
  • Turnaround situations
  • Cyclical stocks
  • Past leaders and laggards

Market leaders are the companies that can grow their earnings the fastest and are easy to spot. The share prices of market leaders up the most percentage-wise in the preliminary stages of a market rally. They are the first to move to the new highs. Most investors think that these stocks have moved too high because of this remarkable strength. Hence, they are apprehensive of buying it. 


The charm about these ultrafast growers is that they grow so fast that even Exchanges can’t value them very accurately. This leads to pricing inefficiency, providing a big opportunity. The objective is to notice and invest in market leaders early in the growth phase when profits are stimulating.


A company with a strong brand and market position is known as a category killer. It is difficult to compete against such companies despite having unlimited capital.


The official growth stocks, also the institutional favourites normally have a good track record of uniform sales and dividend growth. They continuously attract prudent institutional capital because of their proven ability to boost earnings, expand margins and build shareholder value. 


They are also referred to as blue chips.


Despite all good things, these companies have one problem that by the time they reach institutional favourite status, they become big and slow. Although their earnings are even and of high quality, the growth is sluggish. They are so widely observed that there’s little room for quick price appreciation.


A company that is sensitive to the economy or to commodity prices is known as cyclical stock. Cyclical stocks have an inverse P/E cycle. This means they usually have a high P/E ratio when they are poised to rally and a low P/E near the end of their cycle. The trick with cyclical stocks is to comprehend whether the turn of the next cycle will happen earlier or later than usual.


At the bottom of a cyclical swing, the subsequent things happen:

  • Falling earnings.
  • Dividends omitted. 
  • High P/E ratio. 
  • Generally bad news.

The exact opposite happens at the top of a cyclical swing.


A laggard stock belongs to the same group as the market leader but has poor price performance. They are relatively cheaper than market leaders and attract unskilled investors.


Your portfolio should comprise the best companies in the top four-five sectors. Look for new technologies that ensure to help people live longer, work better and enjoy life more. It may also help companies to cut costs and improve capacity and productivity.


Just as leading stocks sometimes indicate an influential advance, it could also warn when the group is steered for trouble.


If a key leader breaks down after an enormous advance, beware. This is often the preliminary symptom that the whole group is about to get sick.

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