There are three types of stocks based on the market value or market capitalization of issuing companies. These are small-cap stocks, mid-cap stocks, and large-cap stocks. Note that market capitalization or market cap represents the total monetary value of all shares or stocks issued by a particular company. Hence, between the three, small-cap stocks have the smallest market cap and large-cap stocks have the biggest market cap while mid-cap stocks sit between the two.
Difference Between Small-Cap, Mid-Cap, and Large-Cap Stocks
Investing in stocks or the stock market often involves choosing from a range of companies. Some investors choose to invest more in either small-cap stocks or large-cap stocks to meet their respective investment goals and objectives. Others spread their investments across all three to diversify their stock portfolio. Beginners might have a hard time choosing between the three. Nevertheless, this article provides a rundown on the difference between small-cap stocks, mid-cap stocks, and large-cap stocks. Take note of the following:
• Size Based on Market Cap: Small-cap stocks are issued and traded by companies with a market cap of between $300 million and $2 billion. Companies with a market cap of between $2 billion and $10 billion issue and trade mid-cap stocks while companies with a market cap of $10 billion or more trade large-cap stocks. Note that the ranges of market capitalization can vary across different geographic markets.
• Stability and Security: Large-cap stocks are more stable and are safer investments compared with small-cap stocks and mid-cap stocks. Larger companies have tested and proven business models and management capabilities. Medium-sized companies can have a higher level of stability and security as well while smaller companies and startups are confronted with issues relating to the marketability of their products and the management of their respective businesses.
• Prospect for Investment Growth: Another difference between the three is their respective growth prospects. Small-cap stocks and mid-cap stocks often outperform large-cap stocks. Data from Standard & Poor Dow Jones indices from 1994 to 2019 show that small-cap stocks in S&P SmallCap 600 Index and mid-cap stocks in S&P MidCap 400 Index tend to have stronger growth than large-cap stocks in S&P 500.
• Investing and Trading Timeframe: Both small-cap stocks and mid-cap stocks have higher growth potential in the long term than large-cap stocks. However, all three are suited for buy-and-hold strategy or passive investing. It is still important to note that small-cap stocks have limited trading volume. Mid-cap and large-cap stocks are suited for day-to-day trading and active investing because of their larger trading volumes transpiring in a day or shorter period.
• Suitability Based on Risk Profile: Stocks are suitable for aggressive investors by default due to the higher risks involved. However, considering the risk-return tradeoff, small-cap and mid-cap stocks are suitable for ultra-aggressive investors because they tend to be more volatile than large-cap stocks. Large-cap stocks are ideal for investors who want to lessen the risk in their stock portfolios.
• Availability and Accessibility: Another difference between small-cap, mid-cap, and large-cap stocks is their availability and accessibility. Small-cap stocks are less accessible than mid-cap and large-cap stocks because their trading volume is low but they are the cheapest. Remember that mid-cap stocks and large-cap stocks are traded in high volumes. Large-cap stocks also represent the majority of the stock market. Investors might have a hard time buying or selling small-cap stocks. This creates liquidity risk.
• Transparency and Market Information: Small-cap stocks are less transparent than mid-cap stocks and large-cap stocks. Most analysts and the media tend to focus on larger companies. Market information about smaller companies is limited. Hence, another critical challenge of small-cap investing is that there tends to be less information that can help individuals come up with informed investment decisions.
Choosing Between Small-Cap, Mid-Cap, and Large-Cap Stocks
There is no ideal investment portfolio because investors have their respective financial goals and objectives, as well as risk profiles. Spreading investments across small-cap stocks, mid-cap stocks, and large-cap stocks can create a diversified portfolio. However, for investors who are willing to take more risks for higher returns, investing in small-cap and mid-cap stocks is ideal. Remember that large companies today started as small companies.
For investors who want to minimize the risks in their stock portfolios, it is ideal for them to invest more in large-cap stocks. Note that larger and more established companies might not provide substantial capital appreciation as determined by their stock prices compared with smaller and medium-sized companies. However, when it comes to preferred stocks or dividend stocks, they provide steadier and more reliable dividend payouts.
It is important to go through the relevant questions in each investment decision. These questions can help individuals map out their unique financial or investment goals and objectives. In addition, one should be aware of his or her risk profile or risk tolerance. Research also plays an important role in maximizing the advantages of investing in stocks, as well as the unique pros and cons of small-cap, mid-cap, and large-cap stocks.