WHAT ARE SMALL, MID
AND LARGE CAPS?

When it comes to investing, market capitalisation can be a factor in helping you decide which stocks to target. These stocks are separated into three groups depending on market capitalisation value. These are small-caps, mid-caps, and large-caps. Find out more about each stock grouping, their pros and cons, and how you can start investing.

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Market capitalisation is the total value of a company’s shares currently held by shareholders. For example, if a company has 5 million outstanding shares, and each share sells for $100, that company’s market capitalisation is $500 million (5 million x $100 = $500 million). 

When doing your research and keeping up with the latest financial news and analysis, you might see articles that reference how stocks are grouped based on their market capitalisation: small-caps, mid-caps, and large-caps.

But what exactly does that mean, and how does it impact the way these stocks perform and affect whether or not you might want to invest in them?

What are small-caps, mid-caps and large-caps?

One way that stocks are sometimes separated is by being put into one of three tiers — small-cap, mid-cap or large-cap.

Below is a short summary of the different market capitalisation ranges of the three primary types of stocks.

Type of Stock	Market Capitalisation
Small-Cap	$300 million to $2 billion
Mid-Cap	$2 billion to $10 billion
Large-Cap	Greater than $10 billion

What is a small-cap stock?

The small-cap definition is a company with a market capitalisation of $300 million–$2 billion. These companies are generally smaller in size and experience and have a lower total number of shares held by shareholders.

Some small-cap stocks you might have heard of include:

• Coursera
• LivePerson
• Danaos Corp

What is a mid-cap stock?

A mid-cap stock is the next step up from a small-cap stock. These are companies with a market capitalisation of $2 billion–$10 billion.

Some popular mid-cap stocks are:

• Williams-Sonoma Inc (NASDAQ:WSM)
• DISH Network Corp (NASDAQ:DISH)
• Syneos Health (NASDAQ:SYNH)

What is a large-cap stock?

Large-cap stocks have a market capitalisation of $10 billion or more. These are generally established companies that have been around for decades and are at or near the top of their respective industry.

There is a good chance that investors have heard or read about many of these large-cap stocks, with some of the most popular including:

• Rio Tinto Ltd
• Apple
• Alphabet

While small-cap, mid-cap and large-cap are three widely used stock rankings, some analysts like to further separate stocks into a few additional buckets:

• Nano cap (stocks with a market cap of less than $50 million)
• Micro-cap ($50 million–$300 million)
• Mega-cap ($200 billion or more)

How are small-, mid- and large-caps ranked?

Market performance determines how stocks are ranked. While the general definition as laid out above is usually the same, there can be slight variations in the thresholds for each ranking. One main effect of splitting the stocks into more detailed rankings (i.e., nano cap, micro-cap and mega-cap) is that it can change which stocks mutual funds buy.

Do stock rankings change often?

The stock rankings classifications do change, but not very often.

Stock rankings have changed through the years as increasing numbers of companies have joined the market and caused it to grow. What was once considered a large-cap company might now fall into the mid- or even small-cap ranking. While these rankings thresholds aren’t set in stone, they also don’t change very often.

What are the pros and cons of small-, mid- and large-caps?

As with many aspects of stock investing, there can be positives and negatives to focusing on small-, mid- and large-cap stocks. Here are some potential pros and cons associated with each ranking.

In a snapshot, the table below highlights the key pros and cons of small-, mid- and large-caps.

Small-caps: pros and cons

One pro of small-cap stocks is that they’re often not an area of interest for larger brokerages and trading institutions because of the companies’ relatively small size. This can make it easier for individual investors to navigate the small-cap market.

Another positive aspect can be the opportunity for growth. Any stock has the chance to increase or decrease in value, but when it comes to, for example, large-caps vs small-caps, small- cap shares can represent a greater potential for growth because they have yet to see sustained exponential success that many large-caps have already experienced. 

On the downside, small-cap stocks can lack liquidity, which means it can be hard to sell them. Because these companies are relatively smaller than mid-cap or large-cap companies — and often less well-known — there might be less interest in them, and, therefore, fewer traders interested in buying or selling them.

There can also be a lot of volatility in the small-cap market due to companies being less established. Consequently, without this solid reputational foundation and proven history of “runs on the board,” they can sometimes be more exposed to any positive or negative events playing out in the market.

Mid-caps: pros and cons

One benefit of investing in mid-cap stocks is that these companies can be in a better position to expand more quickly than small-cap stocks, which can lead to increased share value. Mid-cap companies might be further along in their business cycle than small-cap companies and in a better position to take the next step.

Mid-cap investing can be a good way to catch a company at the right time — after it’s gone through the early troubles of a small-cap company and before it becomes a large-cap. Because they have generally been around a little longer and can be more established, you also might not have the same liquidity problems you have with small-cap stocks. 

That said, there is always risk involved with trading stocks, and mid-cap stocks are no different. While they might have a more solid foundation than small-cap stocks, they still do not have the established foothold of large-cap stocks, meaning they can be more impacted by severe market, industry, environmental or geopolitical fluctuations.

Large-caps: pros and cons

When looking at large-caps vs small-caps and large-caps vs mid-caps, perhaps the biggest pro of investing in bigger companies is that they are well-established. Most blue chip stocks fall into the large-cap category. Many of them aren’t as volatile as smaller companies. Because of this, they are generally seen as safer investing options. Dividends are often another benefit of large-cap stocks. 

One potential drawback of large-caps is they might not have the growth potential of small- and mid-cap stocks. This is because these larger companies have generally already achieved their greatest periods of exponential growth. Similarly, large-cap stocks are probably not a great option for those looking for a short-term investment, as they are better suited for long-term strategies.

What should you know before choosing a category of stocks to invest in?

Here are a few things to consider when deciding which types of stocks you might want to invest in.

What is your investment strategy? Are you looking for long-term investments or short-term options you can buy and sell quickly? If the former, large-cap and some mid-cap stocks might be your best bet. Whereas small-caps could be better suited for short-term strategies.

What else is in your portfolio? This is also tied into your investment strategy. Many people look to diversify their investments. One route to diversification is to include companies of different rankings.

What are your personal circumstances? Your personal circumstances can play a big role in determining your appetite for risk. While all investments come with a level of risk, some can potentially include more than others.

Market capitalisation can play a key role in helping you figure out which stocks to add to your portfolio. By looking at the value of a company’s outstanding shares, you can get an idea of what stage of the business cycle they’re in and what type of investment you could be making. It’s one way to build a balanced portfolio that exposes you to the right amount of risk for your personal circumstances.

Learn more about investing with the eToro Academy.

FAQs

Is market capitalisation the only thing to look for when I start investing in stocks?

A stock’s market cap can be a useful factor in helping you decide which stocks to target. Within a market cap range, an investor should consider a number of other factors.

Do stocks ever change their market cap ranking?

Yes. Over time, small-cap stocks can grow into mid-caps and even large-caps. Investors often seek to find these successful companies when they’re small and enjoy their growth. Large caps can and do shrink to become small-caps, too — think of Macy’s (NYSE: M), as an example.

Aren’t large-cap stocks a safer investment?

All stocks have both rewards and risks. See our section above comparing the pros and cons of small-cap, mid-cap and large-cap stocks. You’ll choose stocks as an investor according to your circumstances, age, interests, appetite for risk and investment strategies.