How to decide between large cap and small cap stocks

Most investors need to decide at some point whether they want to incldue a small cap stock or a large cap stock in their portfolio. This will help you decide which is for you.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Brokerage account
• Internet

1. It's a debate that has gone on for years and it will no doubt continue into the future, should you focus more on buying large cap stocks or small cap stocks? While it may not be the answer you want to hear, it depends on your risk tolerance and your individual situation.
2. A stock is generally considered small cap if it has a market capitalization under $1 billion. Small cap stocks come with large amounts or risk, but with that risk comes a higher upside possibility. Small caps are more liquid than they used to be, but buying and selling them can still get sketchy at times.
3. A stock is generally considered to be a large cap if it's market capitalization is above $10 billion. Large cap stocks are more proven and reliable companies that are more likely to be paying a dividend. These stocks have less potential to bring huge percentage moves to the upside, but they also carry less risk.
4. The older and closer to retirement you are, the more you want to steer toward the large cap stocks. If you are younger and can get a little more risky, small caps deserve a fairly prevalent spot in your portfolio.
5. It is important to note that no one should decide that they will go entirely into small caps or even entirely into large caps. Diversification is an absolute must. The real question lies in what percentage of your portfolio you will put into large caps vs. what you will put in small caps.

Tips & Warnings

• Diversify your portfolio to include both large and small caps to maximize your returns.
• Small cap stocks can have some wild swings, so be ready!