When building a portfolio of stocks, or stock
mutual funds, it's important to take into account how the market capitalization, or market cap, of the stock you're considering fits into your overall strategy.
Market cap — or market value as it's sometimes called — is one way of measuring the size of a company and anticipating its investment potential. Market cap is calculated by multiplying a company's current stock price by the number of its existing shares. For example, a stock with a current market value of $30 a share and a hundred million shares of existing stock would have a market cap of $3 billion.
One size doesn't fit all
Stocks are usually categorized as large-cap, mid-cap, and small-cap. Some experts also use a special category for very small cap stocks, called micro-cap. You'll want to consider diversifying your portfolio among stocks with different market caps, since stocks of different sizes tend to perform differently in the market. For instance, smaller cap stocks may go up in value at the same time the values of large-cap stocks remain flat or go down, or vice versa. And following a period in which one category outperforms the other, the situation typically reverses.
In general, large-cap stocks tend to be less volatile than small-cap stocks. This is because small-cap stocks generally represent younger, less established companies that do not have the financial resources of larger companies and are thus more vulnerable to failure.
As you might expect, mid-cap stocks can offer a middle ground between the growth potential of small-caps and reduced volatility of large-caps. Mid-caps also typically cost less than large-cap stocks, but are less vulnerable in economic downturns than small-caps.
Don Kittell
