You may have seen the terms large-cap, mid-cap, or small-cap on an investment statement or a list of available investment options through an employer’s retirement plan. The term “cap” refers to a company’s market capitalization. That is the value of all the outstanding shares of the company’s stock. A small-cap is a company with a market capitalization of between $300 million and $2 billion. Although $300 million to $2 billion is a lot of money, most small-cap companies aren’t household names. A mid-cap company is one with a market capitalization of between $2 billion and $10 billion. Here you will find companies that many have heard of, but whose products or services are used less frequently or by a limited number of people. Above $10 billion is where we find the large-cap companies. These are generally household names. You would recognize the names of most of these companies, and many people regularly use their products or services. There are also less often used terms, mega-cap, and micro-cap. Mega-cap refers to companies with a market capitalization of over $200 billion. Micro-cap describes companies whose stock may be publicly traded but whose market capitalization falls below $300 million.
Market capitalization contributes to the risk, reward, and role of an investment in a portfolio. Smaller companies may not have the resources of larger companies and are more likely to struggle during periods of economic uncertainty. During periods of economic growth, it is easier for a smaller company to grow on a percentage basis than it would be for a larger company. Low-interest rates can provide favorable conditions for smaller companies to grow, as a smaller percentage of their revenue is allocated to debt service. In contrast, larger companies usually have more access to capital and are often considered to be a better credit risk. Understanding the role market capitalization plays in a portfolio can improve investment selection, portfolio construction, and may lead to better investment outcomes.
