We hear the terms "large-cap", also known as "big-cap" and "small-cap", used a lot when referring to stocks. If you were wondering what this means, big-cap stocks are shares of stock in larger companies, while small-cap stocks are shares in smaller companies. However, don’t let the labels confuse you. Investing in big-cap stocks does not necessarily mean you will see a larger return by investing in them and a smaller return investing in small-cap stocks. If you do, you are missing out on some good investment opportunities in small-cap funds.
Small-cap stocks are often great investments because they tend to have lower valuations. Further, they have the potential to grow into big-cap stocks. One other consideration is that small-cap stocks by definition have changed over time. In fact, back in 1980, what was considered a large-cap then is now a small-cap.
The term "cap" refers to market capitalization. It is determined by multiplying the price of a stock by the number of outstanding shares. All things equal, this is simply an estimate of the value of a company. To determine the actual value, there are other factors to consider, including adding the market value of the company to any of the company’s publicly traded bonds.
On the other hand, big-cap stocks are also good investments, and they refer to large publicly traded companies like Coca-Cola (NYSE: KO) and Johnson & Johnson (NYSE: JNJ). Because of their size, these two examples are also known as blue chip stocks. The reason they are good investments is primarily because they are considered very stable companies with solid management. Therefore, they tend to be less risky than small-cap stocks. However, keep in mind that very large companies can fail, too.
As mentioned early, the size definitions have changed drastically since 1980. For example, in 1980 a big-cap stock had a market cap of $1 billion. However, that size is viewed as small today. Currently, the approximate definitions are as follows:
- Mega-Cap - Over $200 billion
- Big-Cap - Market cap of $10 billion and greater
- Mid-Cap - $2 billion to $10 billion
- Small-Cap - $300 million to $2 billion
- Micro-Cap - $50 million to $300 million
- Nano-Cap - Under $50 million
Historically, the big-cap stocks have gotten most of the attention as Wall Street tends to focus on them. However, they represent the smallest number of investment opportunities. There are thousands of stocks being traded, Mid, Small, Micro and Nano cap stocks. For example, less than 400 companies are considered big-cap, while there are more than 10,000+ publicly traded companies that range from nano-cap to mid-cap. Many of these companies are worth investigating.
Final Thoughts
As you can see, there are good investment opportunities available across the board. However, you should focus on companies that you understand or know as the best investment opportunities. Notice that the focus should not only be on the companies you know. Often, if you have specialized training, you may be uniquely qualified to assess a company in that space. If you like what they are doing and feel the management is right to take the company to higher levels, by all means, invest there. Finally, don’t let names like "big" or "small" be your ultimate criterion for investing in a company. There are good companies out there, big or small, and even the big companies were once small.
