First, I want to make sure you get the title reference
Now that we have that out of the way, I will explain a little more about what those terms mean.
We’ve talked before about market capitalization. We estimated the smartphone market share of Apple’s iPhone and Google’s Android devices. Remember that market capitalization, also called market cap, is the measure of the influence a company has on its market. A large player in the market has a larger market cap than a small player. When referring to a stock that has a market cap of 15 billion, that means the current price of the stock multiplied by the shares outstanding equals 15 billion dollars. There is a very noticeable difference in the stock price movement of a small cap stock as compared to a large cap stock.
Large Cap Stocks
A large cap stock is one that maybe has been around for a while, the company is a titan in its industry. They will typically pay a steady growing dividend and they can afford to do it. Maybe they are in the maturing phase of their business and with plenty of cash, they look to buy smaller start up companies. Typically this is a firm with a market cap of greater than $10 billion. What does this mean for your portfolio? Large cap stocks are usually less sensitive to market movement. If you take a look at the Russell 1000, which is an index that follows large cap stocks, you will notice that although it is down year to date, it is not a negative as the Russell 3000, which is the broad market index.
Mid Cap Stocks
A mid cap stock could be one of a firm that has a little history or could have lots of history. Remember that the share price is a big factor in calculating the market cap so a mid cap stock could just have a low share price. Mid cap stocks typically have a market capitalization of between $2 and $10 billion. How do mid cap stocks fit into your portfolio? Mid cap stocks are typically right on point with the market in general. If you look at the Russell Mid Cap index, you will notice that the dividend yield is a little less than that of the Russell 1000 and the year to date return is a little less than that of the Russell 3000.
Small and Micro Cap Stocks
And now we get to the little guys. Small cap stocks have a market cap of less than $2 billion. These companies could be in start up phase, or in the growing phase of their business, or they could be a company with inefficient management that cannot sustain a high share price. Remember that the share price is reflective of what investors think the company is worth. A higher share price usually denotes a higher value on the company. Micro cap stocks are an even smaller subset of small cap stocks. They have market caps between $50 million and $300 million. Small cap stocks and micro cap stocks offer the potential for bigger gains and are usually pretty risky compared to the market. If you look at a stock’s beta, you can get an idea of how risky the stock is. The Russell 2000 is the index that tracks small cap stocks and you can see that the dividend yield is lower and the performance is more negative than that of the Russell 3000. Looking at the Russell Microcap Index, you can see that the average earnings per share, or EPS, is negative as of August 31st, and the return is much less than the Russell 3000.
When you are constructing your portfolio, it’s important to know how the market capitalizations can affect your overall performance. Do you pay attention to market cap when investing?