What Does Large Cap & Small Cap in Economics Mean?
Economists, investment advisers and financial analysts often categorize stocks and mutual funds based on their size. Categories such as large cap and small cap refer to the level of capitalization the company has. Many mutual funds specialize in investing in the shares of companies with particular capitalization levels. Investing in large- and small-cap stocks or mutual funds carries different benefits and risks.
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Identification
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The terms "large cap" and "small cap" are two categories of market capitalization. Market capitalization is the market value of a company's shares, or the share price multiplied by the number of shares the company has issued. Companies with large capitalization levels are large cap, while those with smaller levels are small cap.
Size
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The Yahoo! Finance website describes large-cap companies as those with market values of greater than $8 billion. It cites companies such as General Electric, Microsoft and retail giant Wal-Mart as examples of large-cap companies. Small-cap companies, meanwhile, have market values of $1 billion or less, Yahoo! says. Another category, known as middle capitalization or mid-cap, stands between the large and small cap categories.
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Considerations
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The levels of capitalization that separate large-cap and small-cap companies are not absolute and may vary across investment firms. Yahoo! Finance's figures for large- and small-cap stocks, for example, are not universal. The investment research firm Morningstar classifies stocks with market capitalization levels of $800 million or less as small cap. (The firm's glossary does not set a figure for large cap.) The Investor Glossary website defines large cap as a company with a market capitalization of at least $10 billion.
Features
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Mutual funds that invest largely in the stocks of large-cap companies show less volatility in share prices, Yahoo! Finance says. The reason for this is the financial stability of large, established companies. The trade-off for less volatility, however, may be lower returns, compared with investing in a fund that has shares of smaller companies.
Funds that invest in small-cap companies may be more volatile, depending on the fund manager's investment style. A small-cap fund managed by a more aggressive investor will have more volatility, Yahoo! Finance says. Aggressive fund managers will often invest in growth and technology companies in hopes of gaining high returns for investors in the fund.
Warning
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Because they are often issued by young or startup companies, small-cap stocks offer the potential for large returns, making them attractive to inexperienced investors who may not be aware of their volatility. Most investment experts and financial advisers suggest having a mix or large- and small-cap shares in your portfolio.
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