Investment strategies designed to obtain long-term financial goals should be balanced and take into account respective market capitalizations of your prospective investments. Market capitalization is significant because it can help investors understand how a company’s size relates to its potential for return and risk.
Market capitalization — or Market Cap — is the combined value of a company’s outstanding stock. You can calculate market cap of a company by multiplying the total number of outstanding shares by the share’s current market price.
For example, if a company had 30 million shares that were selling at $25 a share, its market cap would be 750 million. Since the stock’s current price is an element in calculating market cap, a significant swing in a stock’s price could have a significant impact on the company’s market cap. Consequently, the market cap of a company can change over time.
Why does this matter to investors?
- Market cap allows investors to compare the size of one company to another.
- It may also offer guidance on the company’s future prospects according to the market.
- When it comes to gauging risk, market cap may tell you whether an investment in a certain stock is considered conservative (Large-Cap) or aggressive (Small-Cap).
Small-cap companies are generally those with a market value of $300 million to $2 billion. Typically, these are newer companies that operate in emerging industries or niche markets.
A smaller capitalization generally means the company has more limited resources than a large- or mid-cap company, making small-caps more exposed to economic downturns or competition.
The increased risk is outweighed for some investors by the potential for growth over a number of years. For this reason, small-cap companies may be a good choice for long-term investors seeking high growth.
Mid-cap companies are generally firms with a market value between $2 billion and $10 billion. Like their large-cap counterparts, mid-caps are generally established companies or brand names.
The difference is that mid-caps are in industries that are currently experiencing, or expected to experience fast growth in the near future. This means they may be poised to improve their bottom line by increasing their market share.
Mid-cap companies are typically in a critical growth stage – offering more opportunities for investors and generally less risk than small-cap companies. For these reasons, mid-cap stocks lie somewhere between large-cap and small-cap stock on the spectrum of risk/return.
Large-cap companies are generally firms with a market value of $10 billion or more. These companies typically have steady growth, a long-standing reputation for producing quality goods and services, and historically consistent dividend payments.
These companies are typically familiar to consumers across the nation and are considered the dominant players within their respective industries. For these reasons, large-cap stocks are generally considered conservative investments that offer investors slow and steady growth with less risk than their small- or mid-cap equivalents.