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Understanding Cap-Sized Stocks: An Introductory Overview

Cap-sized stocks reveal a lot of useful info about companies and not just their market cap value.

Filip Dimkovski - Writer for Fortrade
By Filip Dimkovski
a man taking a selfie in front of a tv
Edited by Dragan Stevanovic

Published September 23, 2024.

a sticky note with the word small - cap written on it

Market capitalization is one of the crucial indicators to look up when researching stocks. Stocks can be classified according to market cap, revealing plenty of information about potential investments. Cap-sized stocks provide insights into a company's size and nature, aiding investors in making informed decisions.

Note: The information in this blog is purely educational and should NOT be considered advice.

What Are Cap-Sized Stocks?

Cap-sized stocks are shares categorized by market capitalization, which is the total market value of a company's outstanding shares.

Depending on the market cap value, companies are classified into:

  • Small-cap companies: Up to $2 billion market cap
  • Mid-cap companies: Between $2 billion and $10 billion market cap
  • Large-cap companies: Over $10 billion market cap

Cap-sized stock valuation depends on several factors, including earnings growth, market sentiment, economic conditions, interest rates, and sector-specific trends. External events like geopolitical instability or regulatory changes also affect stock prices across different cap sizes.



Cap-Sized Stocks Performance

Cap-sized stocks help investors understand the company's size, risk profile, and growth potential.



It is generally thought that:

  • Small-cap stocks bring higher risk with higher growth potential
  • Mid-cap stocks offer a balance between risk and growth
  • Large-cap stocks act as more stable investments with steady growth

Small-Cap Stocks

These stocks are known for their high growth potential but have more significant risks. They are sensitive to market changes and have unpredictable price movements.

Historically, small-cap stocks have provided higher returns than their mid and large-cap counterparts over long periods.



Examples include:

  • Sterling Infrastructure (STRL): A company specializing in civil infrastructure and construction.

  • First Financial Bancorp (FFBC): A regional bank that provides financial services such as banking, lending, wealth management, and more. 

Investing in small-cap stocks is riskier but could lead to potential returns, which makes them attractive to bold investors who want fast growth.

Large-Cap Stocks

These are generally considered safer investments because of their significant market presence, stability, and lower volatility compared to smaller caps.

Historically, large caps have shown steady returns and resilience during market downturns. This makes them a cornerstone for conservative investment strategies focused on long-term growth and income.

Examples include:

  • Apple Inc. (AAPL): A technology leader in consumer electronics.

  • Johnson & Johnson (JNJ): A global healthcare products manufacturer.

These companies often have diversified global operations and pay regular dividends.

Mid-Cap Stocks

These companies balance the growth potential of small-caps with the stability of large-caps. They have the potential for significant growth while also beginning to show stability.

Mid-cap stocks have historically often outperformed large-caps during economic recoveries and showed less volatility than small-caps. They bring an intermediate level of risk and return.

Examples include:

  • DocuSign Inc. (DOCU): A company that provides electronic agreement services.

  • Texas Roadhouse, Inc. (TXRH): A company that operates casual dining restaurants, mainly in the United States. 

Key Definitions & Terminology

Market Capitalization

Market capitalization is the value of the company traded on the stock market. The market cap is calculated by multiplying the total number of shares by the current stock price.

Market capitalization = (Total number of outstanding shares) x (Share price)

Market cap benchmarks for small, mid, and large-cap companies help investors assess company size, associated risk, and growth potential. These also help with portfolio diversification and investment strategy.

Liquidity

Liquidity measures how easily stocks can be bought or sold in the market without significantly impacting the price.

Large-cap stocks often have high liquidity. These stocks offer quick trade execution and stable prices, which could be a key factor in decision-making and risk management.

Growth Potential and Moderate Growth

Growth potential shows a company's ability to increase revenue, profits, and market share. Moderate growth refers to steady and predictable growth rates.

Companies with high growth potential offer substantial potential return possibilities at higher risk. Those with moderate growth are attractive to investors seeking stability.

Market Expansion

Market expansion refers to entering new markets or introducing new products. The aim is to increase a company's sales and market presence.

A company can boost its market share through market expansion and attract investors looking for substantial growth potential.

Sector Rotation

Sector rotation occurs when investors move their funds from one industry to another because of economic trends. The idea is to capitalize on the momentum of specific sectors.

This approach requires a solid understanding of economic cycles and market performance to allocate resources effectively.

Institutional Ownership

Institutional ownership shows the portion of a company's stocks held by large investors. High institutional ownership signals market confidence, often leading to more excellent stock stability and liquidity.

Conversely, high institutional ownership can also affect stock availability and price volatility and act as a barrier to individual investors' stock buying.



Market Cap for Smarter Choices

Cap-sized stocks are a great potential instrument to consider. They cater to different types of investors, traders, and strategies and reflect a company's growth potential and stability.

Still, bear in mind that market cap value is no end-all indicator. While it is important, combining market cap with other market indicators and extensive research for a more accurate overview is better.

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