Large Cap Stocks vs. Mid Cap vs. Small Cap: What to Know About Market Capitalization

Market cap can help provide context as to the general level of risk and return associated with a particular stock. Here’s the what’s what of large, mid and small cap companies.

Investing comes with two main questions that many investors consider in light of their financial plan: 1) How risky is this investment? And, 2) What is its growth potential? Those questions can in part be answered through an evaluation of a company’s financial performance and outlook, as well as its history (length of time in business) and size.

How do you gauge those key factors? One common way is through what’s known as market capitalization, which is the value of all outstanding shares of a corporation. Market cap is typically divided into three segments of publicly traded companies: Large, mid, and small cap.

But what are the key differences between these, and what does that mean for your portfolio? Here’s an introduction to each.

LARGE CAP STOCKS

CHARACTERISTICS

These have market capitalizations of $10 billion and greater. Typically, these are industry dominating, mature companies with household-name status and strong financial track records. A few examples of these so-called blue chip companies include Coca-Cola (NYSE:KO), General Electric (NYSE:GE), and Starbucks (NASDAQ:SBUX).

GROWTH POTENTIAL

Moderate growth is a hallmark of large cap companies. However, because they are established, large cap companies tend to have more stable business performance, earnings, and efficiencies at scale, and, in general, are stronger in the face of challenging economic conditions.

While it’s true that even industry giants can take a tumble, creating losses for investors (witness Enron), the cases of complete financial ruin are few and far between.

INVESTING TAKEAWAY

Even though past earnings growth isn’t a guarantee, it’s generally seen as a good bet, particularly if you hold large cap investments for a long time. Having large caps as a part of your investment portfolio introduces an area of less volatility overall, with less aggressive growth than what you might see with smaller companies. Many investors use the dividends offered by large cap stocks as income or to reinvest.

MID CAP STOCKS

CHARACTERISTICS

Mid cap stocks are those with capitalizations higher than $2 billion, up to $10 billion. Usually these are established companies in growing industries that are leveling up their competitiveness and expanding their market share. Some familiar examples include Dicks Sporting Goods Inc (NYSE: DKS), Crocs, Inc (NASDAQ: CROX), and Valvoline Inc (NYSE: VVV).

GROWTH POTENTIAL

Often these companies are in growth mode and are aiming for large cap status. While they do tend to be fairly stable and have a history of steady financial performance, they do tend to be slightly more volatile than large caps.

INVESTING TAKEAWAY

Mid cap stocks are typically seen as attractive to investors because they have the potential to offer the best of both worlds: Even if they have higher relative risk than their larger counterparts, they are well-established, while their growth proposition means they may offer a chance for significant gains. They also offer both dividends and price appreciation.

SMALL CAP STOCKS

CHARACTERISTICS

Corporations with capitalization between $300 million and $2 billion are known as small cap, and they represent the least developed of the publicly traded companies. These companies are usually found in more niche or emerging industries, and so tend to be more volatile and vulnerable in the face of economic headwinds.

Small caps haven’t yet proved themselves in terms of long-term financial performance, yet that doesn’t mean all are in startup territory. In fact, you may be familiar with many small cap corporations, such as AMC Entertainment Holdings, Inc (NYSE: AMC), Bark Inc (NYSE: Bark), and Container Store Group Inc (NYSE: TCS).

GROWTH POTENTIAL

Despite their relative immaturity and reputation for share-price and earnings volatility, these companies can offer significant and proportionately large growth potential. However, they do have less access to resources and capital, which can hinder growth particularly during tough economic times or due to poor business practices.

INVESTING TAKEAWAY

Some investors find small caps exciting due to their fast-paced momentum and their potential for delivering outsized returns. These are generally accepted as riskier investments, but they are prized for their ability to adapt and pivot quickly as market conditions change.

Which market capitalization investments are best suited for you?

There are benefits and drawbacks to each in terms of the reward and risk that they offer; however, each have their place in a well-diversified portfolio. Having a piece of your portfolio in small, mid, and large cap stocks helps to balance stability with growth potential in addition to capitalizing on trends in the economic cycle, as outperformance of each asset class tends to be cyclical in nature.

In the end, the appropriate asset allocation for your goals matters more when it comes to long-term results than which individual securities you select.

The wealth advisors at Ironwood Wealth Management approach managing your portfolio in disciplined, goal-oriented ways. Contact us today to get started in determining the right mix of asset classes for you.