What are “Large Cap, Mid Cap and Small Cap Stocks”?
The terms Large cap, Mid cap and Small cap stocks refer to the market capitalization of the companies and their classification in terms of size. The market cap of a business is determined by multiplying the current share price by the number of outstanding shares. Then the market cap of a business is ranked relative to others. Typically large cap businesses have over $10bn market cap and are global, well-known names such as Amazon or Pfizer. Mid cap stocks have a market value of between $1bn and $10bn and small cap companies are generally those with market cap of between $250m and $1bn.
Key Learning Points
- The market cap of a company is calculated by multiplying its current share price by the number of outstanding shares available
- Some large cap stocks, also known as “blue-chip”, are global well-known companies with market caps in excess of $10bn – such as Apple, Visa and Procter & Gamble
- To be classified as a mid cap stock, a company should have a market value of between bn and bn
- Generally, these mid-cap companies are more volatile than their large cap peers and focus on growth
- Small caps typically have a market cap of between $250m and $1bn and are usually associated with higher levels of risk
Large Cap Stocks
Due to the size and nature of blue-chip companies, investors should not expect them to deliver outstanding share price growth. Large cap stocks are well-established businesses that already represent a reasonable share of their market segment and thus do not typically have the room for growth that smaller companies do. They tend to be less volatile during market stress, offering some capital protection features. Large cap stocks tend deliver on average higher dividends than the broader market. Large cap companies receive a lot of attention from both the media and investors, as a result of which they are considered more efficient and it is difficult to discover price anomalies since they usually trade close to their intrinsic value.
Mid Cap Stocks
As the name suggests, mid caps sit between their large and small peers. Usually, these companies are in the middle stage of their development and still have room for earnings and market expansion. Mid cap stocks offer investors with potential growth opportunities, but are less risky than small caps. They are valued by investors for their portfolio diversification benefits – a blend of growth and stability. Mid caps tend to perform well during expansionary periods when borrowing is relatively cheap and growth is stable.
Small Cap Stocks
Small cap stocks are typically companies that are in the early stage of their development and have a market value above $250m (below that are micro caps), although it can include companies that are declining in value. These companies are associated with higher levels of risk, but on the other hand offer large long-term growth potential. Smaller companies are usually under-researched and under-owned, hence tend to be less efficient and could trade away from their fair value. These stocks could be best utilised as a growth engine in a well-diversified portfolio. Investors should be aware that due to the smaller offering of shares available, the liquidity risk is substantial.
Learn more about how to manage diverse portfolios with our portfolio management certification course.