Market Caps & How They Relate To Your Investing Strategy

stock investingOne of the most important things to look at when investing in a stock is the market cap of a particular company. You can often base your expectations on the potential long term return that you will get based on the market capitalization. For example, it is highly unlikely that Exxon Mobil (XOM) will double in value with its $420 billion dollar market cap. Exxon has the largest market cap in the United States. Meanwhile a small cap company could have the chance to become a multibagger over time.

What is a stock’s market cap?

Market cap is short for a stock’s market capitalization. A stock’s market capitalization is the market value of all of the shares of a company’s share. The market cap of a stock is found by taking the market price of a stock and multiplying it by the total number of common stock shares outstanding.

Large cap stocks

Large cap stocks are companies that have market caps greater than $10 billion dollars. These are the largest companies in the United States and they often have significant sales revenue, earnings, and cash flows. These stocks are more likely to pay dividends and they have growth rates that are moderate to normal. Large cap stocks are most appropriate for defensive investors not seeking to take on a lot of risk. Their large size makes them safer investments than other stocks.

Mid Cap stocks

Mid cap stocks are companies with market caps that range from $1 billion to $10 billion dollars. These are the companies that offer investors both growth and a decent level of safety. Mid cap stocks are not as risky as small caps and not as safe as large cap stocks. They are right between both asset classes. These stocks are appropriate for investors looking to take on more risk and achieve higher levels of growth than most large caps offer.

Small Cap stocks

Small cap stocks are the market’s biggest growth opportunities. These stocks can either make you a whole lot of money or cost you a whole lot of cash. Small cap stocks have market caps below $1 billion dollars. There are some small caps so small that they have sales figures in the hundreds of thousands. A company like Under Armour is an example of a small cap stock that has been able to grow its way out of small cap status.

There are a lot of factors to weigh when stock investing and the market capitalization is one of the areas that should be considered.

 

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4 Responses to “Market Caps & How They Relate To Your Investing Strategy”

  1. Since I am still fairly young, and can afford to risk some of my investment money, I have quite a few dollars in small cap stocks. They have actually proven to be quite profitable, and I hope that the trend continues in the future.

    I am a little nervous about all of the baby boomers selling off their shares though. Mark, do you think this will have a large impact on the overall market?

  2. avatar Meiko says:

    Hi Mark,

    I have an unrestrained approach to investing. So, I really don’t mind whether its small cap, mid cap or large cap. I guess market cap is useful when it comes to buying. Instead of looking at the price per share, it would be good to look at it as if you’re buying the whole company.

    Hi LifeandFinances,

    That phenomenon creates opportunities in the large cap space. :)

  3. avatar Dr Dean says:

    Small caps are definitely more speculative as relatively small purchases or sales can effect the price of the shares-therefore they are more volatile.

    They are also frequently less than 5 bucks a share so many mutual funds can’t own them.

    As long as you are using money set aside for speculation, or they represent a small portion of your portfolio I think it’s fine to own them. IMHO….

  4. Good explanations. When investing in dividend stocks, I only go with large cap organizations….dividend stocks are my version of a safe investment, and anything less than large cap (many REITs) are just too risky to play with.

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