Small-Cap Stocks vs. Large-Cap Stocks: An Overview
Historically, market capitalization, defined as the value of all outstanding shares of a corporation, has an inverse relationship to both risk and return. Large-cap corporations, with market capitalizations of $10 billion and greater, tend to grow more slowly than mid-cap companies. Mid-cap companies fall between $2 billion and $10 billion, while small-cap corporations range from $250 million to $2 billion.
Definitions of large cap and small cap may vary slightly between brokerage houses, but the differences are relatively superficial and only significant for companies on the borderlines.
Key Takeaways
– Publicly traded companies are often segmented by their market capitalization.
– Large-cap corporations grow more slowly than small caps and tend to be more mature and less volatile during rough markets.
– Shares of small caps and midcaps may be more affordable but also have greater price volatility.
Small-Cap Stocks
Small-cap stocks have fewer publicly traded shares than mid- or large-cap companies, with a total value between $250 million and $2 billion. These stocks may be thinly traded, making transactions take longer to finalize, but individual investors have an advantage over institutional investors in this market.
Institutional investors do not involve themselves as frequently in small-cap offerings to avoid owning controlling portions of smaller businesses. Lack of liquidity can be a struggle for small-cap investors, affecting their ability to offload shares and causing fund managers to close funds to new investors at lower AUM thresholds.
Large-Cap Stocks
Large-cap stocks, with market capitalizations of $10 billion or more, are less volatile during rough markets as investors seek quality and stability. These companies make up over 90% of the American equities marketplace and include well-known names like Apple, Berkshire Hathaway, and Exxon Mobil.
Large-cap stocks are often considered core portfolio investments due to their transparency, dividend payouts, stability, and impact on the market economy. They are typically blue-chip companies with established revenue and earnings, global operations, and market leadership.
Key Differences
Large caps have advantages in liquidity and research coverage, trading at prices reflecting the underlying company and higher volumes than small caps. Small-cap stocks are riskier and more volatile investments, with limited access to capital and financial resources, making it challenging for them to fund growth and capital expenditures.
Despite the additional risk, there are arguments for investing in small-cap stocks. Additionally, investors can choose from various small-cap and large-cap ETFs for exposure to these companies without selecting individual stocks. Small companies have an advantage when it comes to generating large growth rates. It is easier for a small company with sales of $500,000 to double their sales compared to a company with sales of $5 million. This is because smaller companies, often managed by a small and intimate team, can quickly adapt to changing market conditions. It is similar to how a small boat can change course more easily than a large ocean liner.
On the other hand, large-cap stocks, which belong to mature companies, may not always offer the best growth opportunities. These companies might struggle to adjust to changing economic trends and could experience turmoil, losing favor with investors. It’s important to remember that just because a stock is considered large-cap, it doesn’t automatically make it a great investment. Investors should do their research and consider looking into smaller companies as well to diversify their investment portfolio.
Small-cap stocks refer to companies with a market capitalization between $250 million and $2 billion. These companies are smaller than the well-known brands often found in the S&P 500. Investing in small-cap stocks can be done through small-cap exchange-traded funds (ETFs) that track small-cap indexes, such as the iShares Core S&P Small-Cap ETF and Vanguard Small-Cap ETF.
On the other hand, investing in large-cap stocks can be done through funds that track the S&P 500 index, which includes the 500 largest companies in the U.S. by market cap. This allows investors to access a wide range of large-cap stocks for their portfolio.
In conclusion, both small-cap and large-cap stocks have their own advantages and disadvantages. While small-cap stocks can offer higher returns, they also come with higher risks. On the other hand, large-cap stocks may provide more stability but with slower growth. DailyBubble recommends investors to consider investing in both types of stocks to create a well-balanced investment portfolio.