Small-Cap, Mid-Cap, Large-Cap | Market Cap Explained
Market Cap Explained
When it comes to investing, one of the most common ways to categorize stocks is through market capitalization as large-cap, mid-cap, and small-cap. In today’s video, we will learn about the meaning of market capitalization and its categories in detail.
Market capitalization refers to the total number of outstanding shares of a company in the stock market multiplied by the current price of each share. It is a measure of the perceived valuation of a company.
For example, if a company has 50 million outstanding shares in the market and the current price of each share is $20, then the market capitalization or market cap of the company is $1 billion.
The companies traded on the stock exchanges can be categorized into three broad categories: large-cap, mid-cap, and small-cap.
Large-cap companies are well-established businesses and have a significant market share in their respective sector. Companies with a market cap of $10 billion and above are referred to as large-cap companies. These companies are strong companies that can hold themselves well in times of recession. Since these companies have a stable business, they tend to be less volatile and hence considered to be less risky than mid-cap or small-cap companies.
Companies like Apple, Microsoft, Amazon and Alphabet are examples of large-cap companies. These companies have a high market share in their respective industry. These companies have generated stable returns over a long period hence considered a good option for long term investors.
Mid-cap companies are established companies, but they still have further room for faster growth. Companies with a market cap of $2 billion to $10 billion are referred to as mid-cap companies. These companies can become large-cap companies in the long run.
Mid-cap companies have the potential for faster growth. However, not all mid-cap stocks are growth stocks, as some operate in a niche market. Mid-cap stocks tend to be more volatile and riskier than stocks of large cap companies.
Companies like NetApp and Zynga are examples of mid-cap companies. These companies are established but operate in the niche segment, and hence the growth potential is considered to be limited in nature.
Small-cap companies have a market cap between $300 million and $2 billion. These companies have significant growth potential, but the risk is also high. These companies are risky because they have a low probability of success over time and they tend to be more volatile. Only those with a very high-risk appetite should invest in small-cap companies. Small-cap stocks are not meant for beginner investors who cannot stomach high amounts of risk or who cannot afford to lose money in their investments.
Companies like Shutterstock and Steve Madden are examples of small-cap companies. These companies have brand names, but the revenue and cash flow are not as high as some large-cap or mid-cap companies. The outcome is that these companies tend to be volatile.
To sum up, it is important to note that the type of stocks you include in your portfolio should be based on factors like your risk appetite and your time horizon.