“Market Cap” and Stock Investing

A company’s market capitalization or “market cap” is its total dollar market value of all of its outstanding shares. The market cap is determined by multiplying the stock price by the total number of outstanding shares. This gives you the total value of the company on the open market. For example, if a company has 20 million shares outstanding, with a stock of $100, the company’s market capitalization is $2 billion.

In evaluating a company as an investment, the market cap should be considered as it can have an impact on both the potential risk and return of the investment. The various market caps are divided as follows:

Micro-Cap

A micro-cap-stock is a stock with a very small market capitalization, typically between $50 million and $500 million. Micro-cap stock companies are considered extremely volatile, primary due to the fact that the price of a micro-cap stock can be substantially influenced by a single large trade. These investments can be difficult to liquidate due to low trading volume. For these reasons, due dilligence is extremely important when considering micro-cap stocks. While these stocks often come under fire for their volatility; recent history shows that they can yield the best returns.

Small-Cap

A small cap stock will typically have a market capitalization of between $300 million and $2 billion. Part of the attraction of small cap stocks is that it is easier for these smaller companies to double their sales than it is for very large companies. This, of course, can lead to greater capital gains. In fact, on an annualized basis, small cap stocks have outperformed large cap stocks by almost 2.5 points over the past 80 years. Like micro-caps though, they carry a higher risk of market fluctuations.

Learn more about small-cap investing

Mid-cap

A company with a market capitalization between $2 billion and $10 billion is considered to be a mid-cap stock. A mid-cap company is in the middle between large-cap and small-cap companies. For many investors, mid-cap stocks are good investment options because of their potential for upside price appreciation with less volatility than the smaller caps. These companies are often well-positioned for growth and have demonstrated resilience to the challenges of the market. These companies have usually had a chance to put solid a management team in place with well-defined product offerings and messaging.

Large-Cap

A large-cap stock has a market capitalization of more than $10 billion. These are the biggest and most well-established companies in the world. Large cap stocks tend to be well-established and operate with less uncertainty than the smaller cap companies. While they are typically less risky investments, they usually have slower growth than smaller companies. Many large-caps stocks are income-producing for the investor through steady and consistent dividend payments.

More about market-cap and stock investing

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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