Sizing Up Stocks: All About Market Caps

Share

For investment purposes, companies generally can be categorized in one of three broad groups based on their size — large-cap, midcap and small-cap. “Cap” is short for market capitalization, which is the value of a company on the open market.

To calculate a company’s market capitalization, you’d multiply its stock’s current price by the total number of outstanding shares. For example, if a company issues one million shares of stock trading for $50 each, its market capitalization would be $50 million ($50 times 1,000,000 shares).

Although there isn’t one set framework for defining the different market caps, one widely used source – Standard & Poor’s – currently describes each segment as follows:

  •  Large-cap generally represents top companies in leading industries of the U.S. economy.
  • Midcap generally represents a phase in the typical business life cycle in which firms have successfully navigated the challenges specific to small companies. At the same time, midcaps tend to be quite dynamic and not so large that continued growth is unattainable. Thus, the midcap segment may offer aspects of the markets not covered by the large-cap and small-cap worlds.
  • Small-cap generally represents a segment of the market that is characterized by less liquidity and potentially less financial stability than that of large caps.

 

The Risk/Return Factor

Given these parameters, it generally follows that a stock’s market cap may have a direct bearing on its risk/reward potential. Recognizing this relationship is important when making decisions about which investments to choose for your long-term portfolio.

For instance, investments in large-cap stocks may generally be considered more conservative than investments in small-cap or midcap stocks, potentially posing less risk in exchange for less aggressive growth potential. In turn, midcap stocks generally fall between large caps and small caps on the risk/return spectrum.

Small-cap companies may be vulnerable to the intense competition and uncertainties of untried markets. On the other hand, small-cap stocks may offer growth potential to long-term investors who can tolerate volatile stock price swings in the short term.

A standard method of gauging the performance of an investment is to measure its returns against those of an index representing similar investments. As with stocks, indexes come in all sizes and shapes. As their names suggest, the S&P 500®, S&P MidCap 400® and S&P SmallCap 600® indexes are commonly referenced representatives of large-cap, midcap and small-cap stocks.

 

Selecting the Right Combination

So what does a company’s size have to do with your investment strategy? Quite a bit. That’s why some investors choose to diversify, maintaining a mix of market caps in their portfolios. When large caps are declining in value, small caps and midcaps may be on the way up and could potentially help compensate for any losses.

To build a portfolio with a proper mix of small-cap, midcap and large-cap stocks, you’ll need to evaluate your financial goals, risk tolerance and time horizon. A diversified portfolio that contains a variety of market caps may help reduce investment risk in any one area and support the pursuit of your long-term financial goals. However, there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 

Michele_Photo_2014

Michele Bjorkgren, Financial Advisor
Compass Financial
p. 515.327.1020 x13
e. michele.bjorkgren@compassiowa.com
Securities Offered through LPL Financial
Member FINRA/SIPC

linkedIn

A little more about us:
Compass Financial is an independent, fee-based financial advisory firm in West Des Moines, Iowa. The Compass Team helps individuals and families develop an inspiring vision of their financial future and a realistic strategy.

By listening closely to our clients’ true needs, wants, hopes, desires and dreams we are able to combine Wealth Management and broad Financial Planning customized to each individual situation. It’s our goal to assist you in developing a personalized financial road map. The results from the process should include confidence that comes from planning. As we all know, life happens, sometimes ambushing the best laid plans. Accepting a new reality and adapting the financial plan is work we have done many times for our clients.

We also offer Financial Check Up or Second Opinion Services to those who want to enhance the service they are already receiving. This should lead to a better understanding of your current plans and give added confidence to your existing advisor relationship.

Sometimes life’s biggest challenges come in the form of transitions, retirement, marriage, health issues, divorce, unexpected loss, or even college savings. Our team at Compass has experienced many of these life transitions, it’s our hope to come alongside you and your family. These defining moments of life provide opportunities to implement financial strategies that can have long lasting impact. The first step is always the most difficult, but can also be the most rewarding. Please Contact Us today to receive your free, no obligation, one hour initial consultation!

Leave a Reply

Your email address will not be published. Required fields are marked *