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Small-, Mid- & Large-Cap StocksIntroductionYou may have heard the terms "small-cap," "mid-cap" or "large-cap" in your reading about stocks and the companies that issue them. This short section will discuss segments of the stock market. It will cover the following topics: We will first read about market capitalization and what it means.
Market Capitalization"Cap" is short for capitalization, which is the market value of a company's stock. Capitalization gives a picture of a company's size. You can calculate a company's stock capitalization by multiplying market price of its shares by the number of shares outstanding ("outstanding" means in the hands of the public). For example, if ABC Corporation has one million shares outstanding, and the price per share is $10, then ABC Corporation has a market capitalization of $10 million. Corporate stock is often grouped by the company's capitalization. For example, one model would group companies as follows: Small-cap -- less than $500 million These lower and upper limits will vary depending upon the model. However, the general classification scheme remains true. You can see that stocks are grouped based on their issuer's capitalization. That is where the terms small-cap, mid-cap and large-cap come in.
Small-Cap StocksThe stock of small companies that have the potential to grow rapidly is classified as small-cap stock. Many of these companies are relatively new. How they will behave in the market is often difficult to predict. Because of their small size, growth spurts can affect their prices and earnings dramatically. On the other hand, they tend to be volatile and may decline dramatically. Most initial public offerings are for small-cap companies. Most small-cap stocks are oriented toward growth. Growth and aggressive-growth mutual funds often look for small-cap companies for their portfolios. Because they look to grow rapidly, small-cap stocks are likely to forego paying dividends to investors so that profits can be reinvested for future growth of the company. Small-cap stocks are popular among investors who are looking for growth, who do not need current dividends, and who can tolerate price volatility. If successful, these investments can generate significant gains.
Mid-Cap StocksMid-cap stocks are typically stocks of medium-sized companies. Like small-cap stocks they offer growth potential, but they also offer some of the stability of a larger company. Stocks of many well-known companies that have been in business for decades are mid-cap stocks. Baby blue-chips are mid-cap stocks that have steady growth and a good track record. They are like blue-chip stocks (which are large-cap stocks) but lack the size of blue-chips. These stocks tend to grow well over the long term. Mid-cap stocks, like small-caps, emphasize growth but pay a relatively larger share of their earnings as dividends.
Large-Cap StocksStocks of the largest companies such as IBM or GE are classified as large-cap stocks. These are large, established companies (many are blue-chips). They often keep large reserves of cash to take advantage of new business opportunities. Together they make up over half of the value of American stock. Because of their large size, large-cap stocks are not expected to grow as rapidly as a smaller capitalized company. Successful mid-caps and small-caps tend to outperform them over time. Investors looking for dividends and preservation of capital with some growth potential choose them. Large-cap stocks pay relatively more in dividends than small- and mid-cap stocks. Investors who want their money to remain relatively safe over the long term are often attracted to large-cap stocks.
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