Understand the breakdown of market capitalization classifications
Market capitalization, also known as market cap, is the value of all outstanding shares of a publicly-traded company. Is there a formula behind it? There sure is.
The formula for market cap is all a company’s shares outstanding multiplied by its stock price per share. In doing that, we get very large numbers, typically ranging from hundreds of millions of dollars to trillions of dollars. The common classification of these values is large-cap, mid-cap, and small-cap.
A large-cap company is a company with a market cap of $10 billion or greater. A mid-cap company is a company with a market cap between $2 billion and $10 billion. A small-cap company is a company with a market cap between $300 million and $2 billion.
As stated earlier, these are common classifications, meaning how a large-, mid-, or small-cap company can slightly differ depending on the brokerage or data provider you are looking at. Being aware of the different market cap classifications is key in understanding the risks involved with investing in certain companies.
A large-cap company is a company with a market cap greater than $10 billion. Companies that are large-cap tend to be less volatile during rough market conditions and are typically considered quality companies. Large-cap companies are the most attractive investment opportunity for the average investor. Large-cap companies make up a large majority of the U.S. stock market because of their size.
A mid-cap company is a company with a market cap between $2 billion and $10 billion. Mid-cap companies are typically looked at as growth investing opportunities. Mid-cap companies are deemed less risky than small-cap companies. Investors that focus on mid-cap companies expect for them to have major improvements in their productivity and profitability over time and become large-cap companies.
A small-cap company is a company with a market cap between $300 million and $2 billion. Small-cap companies are typically looked at as investment opportunities that will allow an investor to go against the grain. Small-cap companies are known to be more volatile and riskier investments due to their unproven business models and lack of strong fundamentals, but that has not stopped some investors looking towards them to beat institutional investors. Investing in small-cap companies is a high risk, high reward scenario.
With a better understanding of the different market cap classification, you can develop a deeper understanding of the entire U.S. stock market. Yes, the market is dominated by large technology companies such as Microsoft, Apple, Amazon, and Alphabet. Still, in understanding that there are thousands of companies in the mid-cap and small-cap space, you are widening your market knowledge.
It is key to always do your research and due diligence before investing in any company in any market cap classification. Being able to understand different aspects of the stock market is important, but being understanding of your strategy, goals, and due diligence process will be key as you continue to grow as an investor.