Understanding Stocks And Market Capitalization

Understanding Stocks And Market Capitalization

by Nov 7, 2019Investments

When you read financial news, you often see companies or stocks referred to as being large-cap, mid-cap, or small-cap. But what does that mean? Well, those terms are financial shorthand for describing a company’s market capitalization.

Market capitalization (market cap) is defined as the value of all outstanding shares of a corporation. For example, if a company has issued a million shares of stock, and the value of each share is one hundred dollars, that company’s market capitalization is one hundred million dollars.

When buying stocks for your investment portfolio, knowing the market cap of each company you are investing in can be helpful. Stocks from companies with a high market cap tend to perform differently than those with mid or low capitalization, and vice versa.

While every company is unique, here are some general guidelines about what to expect from stocks in each class.
 

Small-Cap Stocks

A company is considered to be a small-cap if its market capitalization is between $300 million and $2 billion . Small-cap companies also tend to offer fewer overall shares, which means there often isn’t much trade volume.

Click Here for a quote of the SPDR S&P 600 Small Cap ETF

Because of the smaller number of shares issued and the relatively low trade volume, small-cap investors typically find it takes longer to fill their buy and sell orders than with mid and large-cap stocks. On the other hand, institutional investors tend to ignore small-cap stocks. Because they tend to buy shares in large blocks, which aren’t usually available from small-caps, they often go overlooked, and there may be more opportunities for individual investors.
 

Mid-Cap Stocks

Mid-cap stocks are companies whose market capitalization is between $2 billion and $10 billion dollars. These are often companies that have had some early success and are now in growth mode.

Click Here to see a quote of the Vanguard Mid-Cap Index Fund ETF Shares

Mid-cap stocks have several advantages for investors over small-cap stocks:

  • They have a longer track record and more info is available
  • Mid-caps tend to be more stable than small-caps
  • Chance of being acquired by a larger company is higher

The one potential drawback of mid-cap stocks is that companies often achieve this level of capitalization and then don’t grow any larger. As an investor, this means your returns will not grow because the company (and it’s profits) are not increasing year-over-year.
 

Large-Cap Stocks

Corporations with a market capitalization of $10 billion dollars or more are considered large-cap stocks. Large-cap stocks tend to be less volatile during rough markets as investors fly to quality and stability and become more risk-averse.

Click Here to see a quote of he Schwab U.S. Large-Cap ETF

Large-cap companies account for over ninety percent of the American equities market. These are companies that are common household names such as Apple, Microsoft, Amazon, Google (Alphabet), Facebook, Visa, JPMorgan Chase, and many others.

Companies at this level of market capitalization have a plethora of financial history and information available for investors. Additionally, there are always plenty of shares available and plenty of trading volume for investors to buy and sell daily.

Another advantage of large-cap stocks is that they are the most stable of the three. This means they are less susceptible to market fluctuations and economic downturns.
 

What Kind Of Stocks Should You Invest In?

Before you invest in any stock, you should speak with an experienced financial planner first. Depending on your current financial situation, financial goals, and what stage of life you’re in, your investment strategy will change.

While a broadly diversified portfolio across small, mid, and large-cap stocks tends to be a good approach earlier in life, the same plan may contain too much risk for those about to enter retirement. An experienced financial planner can help you evaluate your options and make recommendations to help you achieve your personal goals.

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