Large-Cap, Mid-Cap, or Small-Cap Stocks: Which is Best for You?
Investing in the stock market offers a variety of opportunities, but choosing the right type of stock is crucial for aligning investments with your financial goals. Stocks are often categorized based on their market capitalization: large-cap, mid-cap, and small-cap.
Each category has distinct characteristics and risk profiles, influencing their suitability for different types of investors. In this article, we’ll explore what these categories mean, describe their respective characteristics, and help you determine which type of stock aligns best with your investment strategy.
Understanding Market Capitalization
Market capitalization, or market cap, is a measure of a company’s total value as determined by its stock price multiplied by the total number of outstanding shares.
It serves as a classification tool to sort companies into three main categories: large-cap stocks, mid-cap stocks and small-cap stocks. The definition of each of these categories differs somewhat amongst investors and stock market indices. In general, however, the following definitions apply:
- Large-Cap Stocks: Companies with a market cap of $10 billion or more.
- Mid-Cap Stocks: Companies with a market cap between $2 billion and $10 billion.
- Small-Cap Stocks: Companies with a market cap between $300 million and $2 billion.
Companies below $300 million are often referred to as micro-cap stocks. The three main categories help investors gauge the relative size and occasionally the stability of a company, which in turn can influence investment risk and potential returns. It is important to remember, however, that a stock is not necessarily a poor investment if it has a smaller market cap and likewise a stock is not necessarily a great investment if it has a larger market cap.
Characteristics of Each Market Capitalization
Large-Cap Stocks
Large-cap stocks often represent established blue-chip companies with a significant market presence. These companies may be more stable and less volatile due to their established market position and diversified revenue streams. Those large-cap stocks that pay dividends, often provide steady dividends and have a long track record of performance. The size and maturity of large-cap companies can lead to lower volatility compared to smaller companies.
Mid-Cap Stocks
Mid-cap stocks are generally companies that are still growing but are not as big as large-cap companies. These companies can have the potential for more growth while still having a level of market stability. Historically, mid-cap stocks have offered a good balance of growth and stability, providing higher growth potential than large-cap stocks while avoiding some of the extreme volatility seen in small or micro-cap stocks.
Small-Cap Stocks
Small-cap stocks represent companies with smaller market capitalization, often in the earlier stages of their development. Due to their size, small-cap stocks have the potential to be more volatile and susceptible to market fluctuations. Historically, small-cap stocks can offer higher returns compared to large- and mid-cap stocks due to their growth potential. However, they can also come with higher risk and can be more affected by market conditions.
How to Incorporate Different Market Caps into Your Portfolio
Consider a portfolio that has a mix of large-cap, mid-cap, and small-cap stocks to capture a broad range of growth and stability.
For over 25 years, Bloom Investment Counsel, Inc. has been providing investment management services to wealthy individuals, family offices, foundations, corporations, institutions and trusts Specifically, Bloom customizes each of its clients’ portfolios comprised of dividend-paying stocks. While no two clients’ portfolios will be identical as they depend on clients’ risk tolerance, goals, time horizon and investment prospects, each diversified portfolio is comprised of 25–30 investments from various sectors and varying market capitalizations. Contact Bloom at 416–861–9941 or info@bloominvestmentcounsel.com to learn more how we can help you protect, preserve and build your wealth with a diversified portfolio.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.