Company Size — When making investment choices, check the size chart
Do the cap math
To figure out a company’s market capitalization (or market cap), you multiply the total number of outstanding shares (those that have been purchased and are currently held by investors) by the current market price of one share.
Company A has 25 million outstanding shares, and the current share price is $100. Market capitalization is $2.5 billion (25,000,000 x $100 = $2,500,000,000).
Select your cap size
Investors like to categorize things for convenience, so companies are generally considered either small-cap, mid-cap or large-cap based on their market cap calculation as shown above. This cap size is one of the factors that can help you determine the risk and return characteristics for a stock or mutual fund.
While opinions vary on exactly where to draw the lines between small-, mid- and large-cap companies, generally, the breakdown goes like this:
|Company Size||Market Cap Range||Characteristics|
Under $2 billion
Small-cap stock prices can be more volatile (higher risk) than mid-caps and large-caps. But they may provide more opportunities for growth since many small-caps are in the early stages of their development.
Between $2 billion and $10 billion
As the label suggests, these companies are in the middle ground. They often share some of the risk/return characteristics of both small-caps and large-caps.
Over $10 billion
These are the big industry leaders. Often called “blue chip” stocks, large-caps tend to be well-established, stable companies that may be growing more slowly. Their financial strength and size generally makes them less risky than small-caps.
Spread the wealth
Small-cap, mid-cap and large-cap stocks tend to perform different under similar market conditions. It may make sense to own a combination of all three cap sizes as you build a diversified retirement investment strategy.
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Growth-oriented stocks typically sell at relatively high valuations as compared to other types of stocks. Historically, growth-oriented stocks have been more volatile than value-oriented stocks.
Securities of mid-sized companies may be more susceptible to price swings and are less liquid than investments in larger companies.
In exchange for higher growth potential, investing in stocks of small- and mid-sized companies may entail greater price volatility and less liquidity than investing in stocks of larger companies.