The sharemarket has many different sectors, and stocks have vastly different investment profiles, hence terminology such as blue chip, speculative, growth, defensive, yield, situation, recovery and other terms, meant to help distinguish the main feature of a given stock.

A so called defensive stock, for instance, is one that may not be a meteoric performer, but hangs in there well when the market or economy falters and maybe even thrives on adversity. Food, alcohol and gambling stocks for example are noted for being good defensive stocks because people still eat and drink in a recession and paradoxically are inclined to gamble even more.

A situation stock refers to a stock whose price is being driven by some special factor such as a takeover battle or severe liquidity problems.

A recovery stock is one perceived as having been 'oversold', or in other words one that has fallen too far and has good potential to bounce back, often with a recovery in its economic sector, and so forth.

For the gambler, the most relevant type of stocks are the specs, meaning speculative situations. These are most commonly found in the mining and exploration, oil and gas, technology, biomedical and internet sectors. The term 'speculative stocks' includes the infamous 'penny dreadfuls', lowly valued companies with share prices usually measured in the cents and with questionable prospects.

Definition of a small Australian mining company: A hole in the ground with a liar at the top.

Perhaps a little harsh, but such homespun wisdom often contains a grain of truth. One is reminded of the cruel but not inaccurate riddle doing the rounds after the property market collapsed in the late eighties...

Q: What's the difference between herpes and a piece of Queensland real estate?

A: One day, with a lot of luck, you might be able to get rid of herpes.

The point I am making is that some stocks have virtually no connection to the real economy, or indeed normal concepts of business at all, and are more akin to buying a raffle ticket. The economic 'pie' might expand by twenty percent, but the owners of such stock would not necessarily get to eat more pie, because such stock was never really part of the pie in the first place. Commonwealth Bank is a real business, whereas Hole in the Ground Pty Ltd is probably not.

NEXT ... Market capitalisation



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