Small, Medium or Large: What Size is Your Stock’s Cap?

As you begin to research investment opportunities, you will sooner or later come across the term Market Cap. This is short for market capitalization which basically defines the value that the stock market puts on a company. The formula used to decide market cap is very simple. It is just the price of the stock multiplied by the number of stocks issued to shareholders. Obviously, companies will fall into three main categories based on these calculations. They will be considered small, mid or large cap stocks. This valuation will be in a state of constant change as the markets tend to fluctuate day to day. For the purposes of this article, we will look at the main advantages and disadvantages of each to the new investor.

Small Caps

Even though the formula for calculating stock value is pretty straightforward, the market value of a company can still differ from broker house to broker house. This is due largely to the fact that these values are in a state of constant change. But generally speaking a company with a market cap of less than one billion dollars is considered to be a small cap investment. These companies are obviously either new or revamping themselves and have yet to prove long term growth and productivity. This newbie status gives these companies a somewhat less than stable reputation and as a result, investors see them as having greater risk potential. Companies that are new or less established can often succumb to the effects of a poor economy leaving investors with nothing. On the other side of the coin, new companies may also have enormous opportunities for growth which can increase their income earning potential, often offering large returns over the long term. There is certainly more risk involved with small cap funds.

Mid Cap

The next group of companies, whose assets are generally said to be between one and eight billion dollars, are considered mid cap funds. While a little more stable than the small caps, mid caps are still not as established and secure as many large, well known conglomerates. Because A mid Cap Company is not as vulnerable to the ups and downs of the economy as a small cap company is the amount of change from day to day is less. As a result, these middle ground funds are very attractive to the mid level, relatively conservative investor.

Large Cap

The final group to be mentioned is the large cap companies. These monsters often have market caps of over 8 billion dollars and definitely include the biggest kids on the block. The risk level is very low with large cap stocks and this makes them great for investors who want to leave their money someplace safe and secure for long term goals.

Once you understand these differences, it is a lot easier to figure out just what size cap you want to put in your portfolio.