Small Cap Vs. Large Cap Stocks
Capitalization is the number of shares issued and outstanding multiplied by the current stock price. Depending on the resultant amount, stocks can be classified as small cap or large cap, although investors also use other categories such as microcap, midcap or mega-cap.
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No Chinese Wall
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Capitalization reflects the current size of a company. Most companies start small. As they grow and issue more stock, their capitalization increases, so a small cap may eventually become a large cap. On the other hand, nothing in the market lasts forever. A large cap may become a small cap again if the company stops growing, runs into financial trouble and its stock declines significantly. Investors may still think of such a company as a large cap but, strictly speaking, it no longer is. Eastman Kodak is a good example of a once mighty company whose shrunken capitalization now puts it into the small cap category.
Size in Dollars
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There is no one universally accepted standard for placing a company into a particular category. The rule of thumb is that companies with a capitalization of $2 billion or less are small cap; $2 billion or more -- large cap, although in reality companies with a cap between $2 and $6 billion are usually called midcap; and the largest companies, such as ExxonMobile or Microsoft, are called mega-caps. Companies with capitalization of less than $500 million (or $100 million) may be called micro-caps.
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Market Segments
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Small cap and large cap stocks reflect different segments of the market. Most small cap stocks represent small, often unproven, enterprises that are bringing new products and services to the market. Many small caps eventually disappear after a few years, either because they fail or because they get bought out by larger competitors. Some small caps eventually become large caps.
Large caps represent large established companies with multiple product lines and recognized worldwide brands, such as McDonalds or Boeing. Many pay dividends.
Market Behavior
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Capitalization is useful because small caps behave differently from large cap stocks. Small cap stocks are more volatile. Investors can make a lot of money fast in small caps, but they can also lose a lot. Large cap stocks don't fluctuate as much, and their moves are more gradual. Small caps are therefore suitable for aggressive investors, while conservative investors prefer large caps.
Small Cap vs. Large Cap Investing
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Investors often want to know where they can make more money. One can generally make more money in a small cap stock because it has more room to grow. A large cap just cannot grow as fast as a small cap, because it already sells to everyone. So the greatest investment opportunities come from small caps. However, there have been long periods in which large caps as a group outperformed small caps.
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