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Small-caps and large-caps. What’s the difference for those who buy them?

Shorthand for “market capitalization,” the term market cap refers to the total value of all a company’s shares of stock. One can calculate it by multiplying the share price by the total number of outstanding shares. For example, if a company has 100 million shares that trade at $20, its total cap is $2 billion.

Capitalization tells about the business size and gives some idea of ​​the risks and investment returns. Large-cap companies are considered less risky. As a rule, these are stable companies and segment leaders, the so-called blue chips. On the other hand, small-caps’ shares carry more risk, but they are potentially more profitable regarding growth opportunities.

Companies with different market caps

  • Mega-caps cost $200 billion or more. These are such companies as Apple, Microsoft, Alibaba and Alphabet.
  • Large caps are $10-200 billion. These are Ford, Autodesk, CVS Health, and JD.com.
  • Mid-caps cost $2-10 billion. These are Ralph Lauren, Alaska Air Group, and Vipshop.
  • Small-caps cost $0.3-2 billion. Samples are Beyond Meat and Baozun.
  • Micro- and nano-caps cost less than $300 million and less than $50 million, respectively. Nano-caps are young venture businesses without a proven financial model.

Due to market volatility, this division by market cap could be slightly incorrect. During a market crash, companies may temporarily fall out of a particular stock class, although the fundamental business layers remain the same.

Stock indices can be helpful

Use stock indices as benchmarks to gauge how the companies of interest are performing. S&P 500 covers the large-caps market. Russell 2000 can serve as the leading indicator for a small-caps segment.

What are the best stocks to invest in?

Large-cap stocks provide stability and consistency through their size, breadth, and financial resources they can draw on to hedge downturns and can pay dividends.

Small-cap stocks are riskier and more volatile investments, as they do not have the same financial resources large-cap do and are still developing their businesses. Each has its purpose for investors: small caps can provide growth but will be risky, whereas large caps have less room for growth but will provide less volatility.

Lack of market liquidity can sometimes benefit small-cap investors who’ve already bought shares. If many people suddenly seek to buy a less-liquid stock, it can be a better price driver than it would be for a more liquid asset.

Good portfolio management involves combining well-chosen small-cap stocks with less volatile large-cap stocks.

If you’re a trader, long-term fundamentals aren’t that important. It’s because you’re using shorter time frames. Trade any kinds of “caps” you want!