When it comes to investing, knowing your options is paramount. You need to know about different ways to invest, types of companies to invest in, and more. Perhaps one of the most important things to know is the three main types of companies: small-cap, mid-cap, and large-cap.
Knowing the difference between these three types of companies can help you know what to put your money into. Maybe you’ll want to take your chances on raking in higher-than-average returns, so you’ll invest in a small-cap. Or maybe you want to put your money into a large-cap to steadily grow it. Knowing your investment goals is important, and it all starts with learning about small-caps, mid-caps, and large-caps.
What Is Market Cap?
Market cap—or market capitalization—refers to the company’s size and worth. This is determined by the total dollar market value of a company’s outstanding shares of stock. To find a company’s market cap, you multiple the number of outstanding shares by the share price. The share price is determined by supply and demand. If that company is doing well and offers something favorable, stock prices tend to rise. However, if stock is low, it is because the company’s future does not look good. Typically, the higher the market cap, the bigger the company.
Market cap matters because it can help investors determine the type of company it is, and therefore, the risk associated with that company. Usually, the smaller a company is, the higher the risk. Overall, knowing a company’s market cap is a simple and effective tool for risk assessment of those stocks you might be interested in. It can also help you achieve portfolio diversification by showing you the different sizes of companies.
Market Cap: $10 billion +
Large-cap companies are those with a market cap of $10 billion or more. They have grown to have such a large market capitalization because they have been operating for a long time. These companies are well-established and major corporations in their respective industries.
Investing in large-cap companies won’t necessarily rake in large returns, but in the long run, these companies could help build your wealth. Large-cap share prices generally increase over time, steadily increasing the value of your share. Some large-caps also give out dividends.
Examples of large-cap companies include:
- Johnson & Johnson
- JP Morgan Chase
- General Motors
Market Cap: $2-$10 billion
Companies classified as mid-cap have a market cap of anywhere from $2-$10 billion. They are typically established and tend to be found in industries projected to experience rapid growth. Mid-cap companies can either be on their way to becoming large-caps or are already operating at full potential in stable, profitable conditions. Although they are riskier investments than large-cap companies, they still hold growth potential, making them favorable to some investors.
Examples of mid-cap companies include:
- American Eagle Outfitters
- Tempur Sealy
- Dunkin’ Brands Group (Dunkin’ Donuts)
Market Cap: $300 million – $2 billion
Small-cap companies are the smallest—and riskiest—companies of the three. They have a market cap of anywhere from $300 million to $2 billion. These companies are small because they are either relatively young in age or are serving niche markets or new industries. Their size is what makes them particularly risky. Because they are smaller companies, they lack the necessary resources to tide them over if they were to experience an economic crisis, such as a dip in the economy. Although investing in them is a very high risk, some investors choose to invest because small-cap companies could make unusually large returns. For example, Walmart and Apple both started out as small-cap companies and are now some of the largest companies on the market. This shows that when you invest in smaller companies, you have the possibility of investing in the next huge company—which could potentially make you lots of money.
Examples of small-cap companies include:
- VirnetX Holding Corp.
- Tronox Holdings PLC
- Smith & Wesson Brands Inc.
- Novavax Inc.
The main difference between these three companies is their market capitalization and risk factors. For instance, small-cap companies have the lowest market cap and are the riskiest. However, they are appealing because they have the potential to make you more money than large-cap companies. On the opposite side of the spectrum, large-cap companies are secure in their industry, profitable, and usually stable investments. Like small-cap companies, mid-caps have a history of outperformance, but some of the security of large-caps.
Which One Is Right for You?
When deciding whether to invest in small-caps, mid-caps, or large-cap companies, the decision is determined by your goals. Here is a general rule of thumb:
For gradual increase of wealth and steady growth:
Invest in large-cap companies. Their stock prices usually continue to rise steadily throughout the years. Plus, you might be able to invest in companies that give dividends, increasing your returns.
For potentially high earnings:
Invest in small-cap and mid-cap stocks. Although they are high risk, they tend to outperform their larger counterparts throughout the years. To mitigate the risk of investing in these volatile stocks, make sure to research the companies you want to invest in beforehand. Look at their past performance and earnings to gauge future performance. Portfolio diversity can also help you offset any losses incurred by the poor performance of a small-cap or mid-cap stock.
Consider investing in all three types of stocks in different industries to diversify your portfolio, which helps you keep your assets secure and offset any losses.
Investing the Smart Way
No matter what you choose to invest in, make sure that you have done thorough research. This means looking into the company’s past performance, being aware of the current market type, and understand what the company’s market cap is. Doing all of these things can help you improve your chances of becoming successful in investing.
Now that you know the differences between small-caps, mid-caps, and large-caps, you are one step closer to making investment decisions that could potentially bring you big returns. Click here to learn more about the Small Cap investment with Dear Retail Investors.