Market capitalization refers to the total market value of a company. Investors find this information useful because companies that fall within the same market capitalization category (small, mid, or large) often have similar performance characteristics.
Market capitalization is calculated by multiplying the current market price of the stock by the total number of shares outstanding. For example, if XYZ Corporation has 100,000 shares outstanding at $10 a share, its market capitalization would be $1,000,000.
Generally, companies fall into one of the three categories of market capitalization:
- Large Capitalization (large-cap) stocks have a market capitalization of more than $15 billion.
- Mid Capitalization (mid-cap) stocks have a market capitalization of between $2 billion and $15 billion.
- Small Capitalization (small-cap) stocks have a market capitalization of between $300 million and $2 billion.
Note: under $300 million is considered "microcap."
When using market capitalization as an investment tool, it is important to remember that generally, no one class consistently outperforms the others. A diversified portfolio containing stocks of different sizes can be a practical means of seeking long-term investment success while managing risk. To learn more about market capitalization and other diversification methods, contact your financial professional.
Investing in Small-Cap Companies
Small-cap companies are usually young and unproven, without many products to sell and thin financial reserves. Because these companies are small and unknown, it may be difficult to find information on them. They may not be covered by analysts and may be inaccurately valued. Small-cap companies are vulnerable to economic slowdowns and recessions and their stocks tend to be volatile. While investing in small cap stocks carries substantial risk, they offer investors greater earnings potential than larger, more established companies.Investing in Mid-Cap Companies
Mid-cap stocks have a large volume of shares to trade on major and regional exchanges. But the companies are smaller and less mature than large-cap stocks. Typically, they offer a greater potential for growth than larger companies, but the risk is also slightly greater.Investing in Large-Cap Companies
Large-cap companies are typically well-known companies with a variety of products and services. Given their size and success, most have proved to be capable of surviving recessions and other temporary setbacks. But despite their market presence and strength, they are not immune to bad news and should not be considered risk-free investments.Analysts carefully track these companies since they are large, established corporations. However, their earnings growth potential is not as great as that of a developing small-cap. Consequently, because large-caps are not compelled to reinvest all their profits into the growth of the company, a portion can be distributed to shareholders as dividends.