Choosing the Right Capitalization
Small, mid and large cap stocks all have their individual
benefits. But which one is right for you?
One size usually doesn’t “fit-all” and especially not when it comes to the stock market. Choosing the right
sized company or fund can be a tricky prospect. “How are the different levels defined?” and “What are
the pros and cons of each type?” are two major questions many people have. When dealing with market
capitalization and deciding which size is right, it can be a tough choice, so here’s an overview of all three
major categories of market capitalization.
Small cap stocks are companies who typically have a small market
capitalization. (Usually somewhere between $300 million and $2 billion, but
definitions vary). Market capitalization, simply put, is the price of the company’s
stock, multiplied by the number of shares outstanding. It’s basically the value the
market places on a company.
With the potential for growth, comes the potential for risk as well. All portfolios
should be properly diversified to help reduce overall portfolio risk. Investing is
small cap stocks comes with an additional set of risks unique to these types of
investments, consequently any money you invest in small caps should be money
you’re prepared to expose to these risks. Small cap stocks are also more
difficult to research and choose precisely because of their obscurity.
The definition of a mid cap varies greatly depending upon who you ask. Some
define mid caps as being companies with a market capitalization between $1.5
billion and $5 billion. Others bump that number up a bit and define them being
between $2 billion and $10 billion. In the end, it depends on exactly who you
ask. Mid caps are generally thought of as a happy-medium between the growth
of a small cap, and some of the stability of a large cap.
Large caps also vary in range, depending on who’s answering. In many cases,
large caps, or blue chip stocks, are stocks with a market capitalization
between $8 billion and $100-200 billion. This range includes some of the
giants. With the larger cap companies, you get more proven stability and less
volatility. But in many cases, that means less glamorous returns and a smaller
chance for growth.
As with the other two levels of capitalization, it’s not a one-size fits all. Some investors want the proven
reliability of the big names. Others value the large caps because they’ve already experienced their
growing pains, and are now established. Many large cap companies also do a great deal of work around
the world, which means an added flavor of global diversification. Numerous developing countries are
seeing the birth of a middle-class (China, Brazil, etc.) and many large U.S. companies are seizing the
day and expanding their reach.
Each type of market capitalization category comes with its own unique risks and rewards. Trying to
balance the risks and rewards of all of the assets in your portfolio can be tricky. Consulting with a
financial professional can help you identify which investments may be appropriate for your situation.
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