Stocks represent ownership in companies of various sizes. Understanding the relationship between company size, return potential, and risk is crucial if you're creating a long-term investment strategy. With this knowledge, you'll be better prepared to build a balanced stock portfolio that comprises a mix of market caps.
Typically, companies are 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, multiply its stock's current price by the total number of outstanding shares. Generally, market capitalization corresponds to a company's stage in its business development.
Typically, investments in large-cap stocks are considered more conservative than investments in small-cap or midcap stocks, potentially posing less risk in exchange for less aggressive growth potential.
Midcap companies may be in the process of increasing market share and improving overall competitiveness. This stage of growth is likely to determine whether a company eventually lives up to its full potential. Midcaps may offer more growth potential. Therefore, midcaps may offer more growth potential than large caps. Footnote 1. The relatively limited resources of small-cap companies may make their stocks more susceptible to a business or economic downturn, and they could also be vulnerable to the intense competition and uncertainties of untried markets.
On the other hand, small-cap stocks may offer significant growth potential to long-term investors who can tolerate volatile stock price swings in the short term. Footnote 2. 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. The Russell is another prominent index for small-cap stocks.
Footnote 3. Over time, large-cap, midcap, and small-cap stocks have taken turns leading the market as each can be affected differently by market or economic developments. That's why many investors diversify, maintaining a mix of market caps in their portfolios. When large caps are declining in value, small caps or 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.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close. Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. In the U. Even if they operate in very different industries, companies of similar sizes and market cap generally share a certain qualities that have implications for investing:.
You can easily find market capitalization data, real-time stock prices and total number of shares outstanding using stock and fund screeners as well as resources like Morningstar , a leading investment rating agency.
Large-cap market milestones are frequently covered by non-financial media, like when Apple became the first-ever U. Large-cap companies are typically household names, with a solid reputation for producing quality goods and services. Many of these companies have expanded their operations beyond the U. Still, large-cap stocks have lower growth prospects than their small- and mid-cap counterparts that are still expanding their market share.
The tradeoff is that large-cap stocks are less risky and less prone to wild swings in their stock prices. As a result, large-caps are considered to be a more conservative investment choice than either small- or mid-caps.
The biggest differences in the stock market are between large-cap and small-cap stocks , and it boils down to more than just the difference in size. That translates to some different risks and rewards when investing. Investors often gravitate to large-cap stocks for a very simple reason: These are the companies they know well and hear about all the time. As with investing in general, purchasing individual shares of these companies is riskier than buying a mix of them or investing in an index fund that tracks the performance of hundreds or thousands of these stocks.
Investing in large-caps as a group can balance out the risks of any individual stock while positioning you to benefit from the overall gains in the market with less risk and volatility. Large-cap stocks may also recover sooner from any broad market declines because these companies are better suited to weather economic downturns.
Because of this, it can be tempting to invest solely in large-cap stocks, but doing so limits the potential for the even bigger gains that mid- or small-cap stocks might deliver. That said, your asset allocation could differ from these types of guidelines based on your risk tolerance and investment goals.
Most stock index providers have large-cap indices. Spread bets and CFDs are leveraged products and can result in losses that exceed deposits. Please ensure you fully understand the risks and take care to manage your exposure. Further, BlackRock, Inc.
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