BIG STOCKS OR SMALL STOCKS – THE DIFFERENCES
Market capitalization is the most commonly used measure of the size of a company. You can find market cap for any significant company on any of the leading financial websites including Yahoo Finance or Bloomberg.
The size of a company can make a big difference especially as larger companies tend to have a different reaction to the market than smaller companies.
At this stage let us make a definition of size. There are two ways that are used to measure the size of a company: revenues and market capitalization.
How can we Define Size?
Revenue is the less reliable of the two metrics because each industry is different and revenue metrics will give unreliable results as to a companys size if not in the same industry.
Market capitalization is the general standard for measuring the size of a company. Market cap can be calculated by taking the number of outstanding shares and multiplying them by the last stock price.
A company that has 50 million shares of outstanding common stock and a last stock price of $50 has a market cap of $2.5 billion.
As a comparison of size between companies market cap is more accurate since the industry and other factors are not relevant to this calculation.
How to Find Market Cap
Any stock quote from a website such as Yahoo! Finance, MSN Money or Bloomberg will enable you to see the market cap of the company you are being quoted.
How Does Market Cap Define Company Size?
The rough cutoffs for definition of the type of company by market cap are as follows:
Micro Cap – $300 million and under
Small Cap – $1 billion and under
Mid Cap – $8 – $1 billion
Large Cap $100 – $8 billion
Mega Cap Over $100 billion
It is worth noting that these are arbitrary figures and other sources may have different definitions and cut offs.
Understand That Volatility is to be Expected.
Investments made in smaller companies can bring impressive results from time to time but also historically have always held the biggest risks to the investor because many such companies fail to deliver any return on investment due to failure of the company and a lack of assets to back up the companys obligations to stockholders after failure. That being said, Microsoft was once a small company whose investors saw extremely impressive return on their investments.
Even large companies are not guaranteed to survive in this market climate but they will generally provide a less risky investment vehicle to consider as a part of your portfolio. Small firm stocks can be much more risky but sometimes give their investors high returns.
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