Size doesn’t always matter, but when it comes to market cap, it can make a world of difference.
Market capitalization — or market cap, for short — is a simple metric that can tell you about a company’s size. There are several market cap categories, but the actual number varies from one business to the next.
Each market cap category comes with potential benefits … but that also mean possible downsides. Savvy traders know to consider these points before investing money in a particular company.
To make smarter trading decisions, you need to understand how market cap is calculated and why this metric matters. Read on to learn the differences between the market cap categories and how you can leverage that information.
A Look at Market Cap Categories
Before I dig into the individual categories, let’s start at the beginning…
What exactly does market capitalization mean? What is this metric?
In simple terms, the market cap is a dollar amount that represents the total value of a company’s outstanding shares. Calculating a company’s market cap is pretty simple: Research the total number of shares and multiply that number by the current price per share.
FOR EXAMPLE: Let’s say a company has 5 million shares and the price per share is $5. Multiply 5 million by $5 to get the market cap. In this example, the market cap is $25 million.
That dollar amount determines which category the company falls in. Let’s take a peek at those categories.
Large-Cap
You can likely guess based on the name … large-cap companies have the highest market-cap numbers.
Usually, to be considered a large-cap company, the market cap needs to cross the $10 billion mark. While most fall in the $10 billion to $100 billion range, there are quite a few that go over $200 billion. When a company’s market cap is that massive, they’re sometimes called mega-cap companies.
Large-cap companies are commonly industry giants. Think household names or, at least, highly recognizable in their respective sectors — General Electric, Apple, Amazon, Exxon Mobile, JPMorgan Chase, and Walmart.
Mid-Cap
The label ‘mid-cap’ can seem misleading. Companies in this category usually land between the $2 billion and $10 billion marks. That’s still fairly sizeable.
Some mid-cap companies are well established in the consumer market place, and you’d probably easily know their names. Others may not be household names due to their industry, and some are in growth phases.
Even if they aren’t part of your daily lexicon today, they could be tomorrow…
The maker of the Roomba, iRobot, is a mid-cap company. Whirlpool and Planet Fitness also fit in this category.
Small-Cap
By and large, small-cap companies typically fall into the $250 million to $2 billion range.
These companies can represent newer businesses or be in an emerging industry. The marijuana/cannabis industry is a prime example of an emerging sector that sparked many of today’s small-cap companies.
Not many small-cap companies are household names, but you might recognize a few. Names like Ancestry.com and GoPro are two recognizable small-cap companies.
Why Market Cap Size Matters
As a trader, you need to understand what’s working for you and against you. When it comes to market cap size, you’re faced with benefits and drawbacks, all of which you need to consider.
One area where large-cap stocks completely outshine small-caps is historical data. Since most large-cap companies are long well established, you can usually find tons of information in your company research.
Small-cap companies, on the other hand, might not have much history in the market. Unless the company’s in a sector that just doesn’t support growth beyond the small-cap category, most of these businesses don’t have decades in the market like many large-cap companies.
Conducting fundamental research on a small-cap stock can be tricky. There’s not always a lot of financial data available to help you spot important insights into the stock’s potential.
What about the pros and cons of investing in each of the market cap categories? Here’s a look at some of the essential points to consider.
Large-Cap Stock Pros
The biggest benefit of large-cap stocks is that these companies can be harder to rattle. These are often established industry leaders. The odds these companies will topple quickly is pretty minimal (though not impossible).
Let’s look at Facebook for an example. The Cambridge Analytica scandal cost Facebook $134 billion in value initially. Shares tumbled a shocking 24% — that could spell doom for some smaller businesses. But Facebook managed to recover its lost value in less than two months.
That’s one case of just how resilient some large-cap companies can be.
These companies can offer growth potential, but it tends to be a slow-and-steady rise, not a rapid increase.
Large-Cap Stock Cons
Most large-cap stocks have lower risk than their smaller-cap counterparts. These stocks commonly have a higher value, so you’re likely facing a high asking price. Price movement is also slower. Quick, large returns aren’t very likely … unless the company does something truly monumental.
Small-Cap Stock Pros
Small-cap stocks typically come with lower price tags than their large-cap counterparts. Many of these companies are growing while striving to root themselves in the market.
If they manage to get a foothold, exponential growth can be possible. And that can mean bigger, faster returns.
Small-Cap Stock Cons
Simply put: small-cap stocks come with higher risk. Potential is just that — potential. There are no guarantees for growth or success with these companies. Some struggle for years to gain ground. Others completely fail.
A single bad incident can shuttle them off into oblivion, and you can lose, big time.
For example, some marijuana stocks show promise, particularly as more states move to legalize. But if the U.S. feds decide to crack down or if new regulations are less favorable, that could be the end for some smaller cannabis companies.
Mutual Funds: Large-Cap vs. Small-Cap
If buying individual stocks doesn’t align with your strategy, mutual funds can offer an alternative approach. Each mutual fund is made up of a group of stocks and securities, sometimes based on a commonality.
Mutual funds are available in specific market cap sizes. Large-cap mutual funds feature large-cap company stocks, while small-cap mutual funds focus on small-cap companies.
Mutual funds come with a degree of diversity since they’re a collection of stocks from different companies. This may help limit your overall risk (compared to buying individual stocks) and can help you maintain a balanced portfolio, especially if you’re a first-time investor.
But that doesn’t mean you can shirk your research responsibilities. You still need to analyze the companies in the fund. Not every mutual fund will achieve the same return rates, and some are higher risk than others. Before you commit any money, know what’s at stake.
SwingTrades With Paul Scolardi
I’m Paul Scolardi. My specialty is finding momentum stocks before they hit the mainstream and rocket up.
I aim to find strong contenders for swing trades, buying low and selling high.
You can learn more about swing trades in my SwingTrades program. My students learn my methods to help track down stocks before they potentially start a big rise. Join us today!
What’s your trading go-to: large-, mid-, or small-cap stocks? Tell me where you prefer to trade. Leave a comment!
