You've heard about the significance of diversifying your investment portfolio and you'd like to experiment with stocks of different sizes. Market capitalization, also known as market cap, is a common way to accomplish diversification because it exposes you to companies that are in different stages of growth. While there's no static defining limits for the small-cap, mid-cap and large-cap categories, there are some standards that are acceptable in the markets and that will help you organize your investment portfolio.
Market Cap and Volatility
Market cap is the result of a calculation that involves multiplying a stock's current market value, or stock price, by the number of shares outstanding -- the number of shares held by stockholders. Each corporation's number of shares outstanding is listed on its financial statements, but finance publications also provide this information for you. While all stocks are inherently volatile, small-cap stocks generally are the most volatile because the issuing corporations have the least resources to rely on when times get tough. Large-cap stocks, on the other hand, are generally stable investments that can brag on profits, experience and a trading history.
Think back to when you were entering your teenage years. You were convinced that you were more mature than your folks insisted, and you just couldn't wait to do grown-up things -- sometimes at your own peril. It's fair to think of small-cap stocks, which have a market cap of below $1 billion, as the adolescents of the stock market. Small-cap stocks have much growth yet to attain and there's no telling what hindrances might prevent them from succeeding. In the three months leading up to February 2013, small-cap stocks were producing higher returns than their large-cap counterparts. Nonetheless, market professionals feared that prices had reached unjustified levels and that small-caps would be the first to falter in market weakness, according to a 2013 article on "The Wall Street Journal" website.
Mid-cap stocks have a tendency to fly below the radar of market critics because they can be out-shined by large or small companies. Mid-cap stocks are larger than small-cap stocks but their market cap doesn't typically exceed $8 billion. Nonetheless, you'll find that mid-cap stocks, which were once small-cap stocks, are on the path to becoming the next market leaders. As former small-caps, they've proven that they can increase their quarterly profits, plus they commonly expand via mergers and acquisitions. In the two decades leading up to December 2011, investors earned higher returns from mid-cap stocks than they did industry-leading large caps, according to a Standard & Poor's report cited in a 2013 Reuters article.
Large-cap stocks are those of corporations with a market capitalization of $8 billion or more but less than $200 billion. With regard to growth, large-cap corporations are the tortoises and small-cap corporations are the hares. The nature of large-caps prevents them from moving or expanding too quickly. That doesn't mean that large-cap stocks can't grow, as they're still smaller than their mega-cap counterparts, whose market-caps exceed $550 billion.
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