Back to Basics: Difference between Large-Cap, Mid-Cap and Small-Cap Stocks

A fresh flow of funds from investors is making a substantial shift to the mid and small-cap stocks in recent years, solely on the assumption that they may outperform large-cap funds in the long run. But a prudent investor, not going by the assumptions, will always follow-up the benchmark indices and not bother much about the actual funds themselves. It is definitely legit for an investor who knows only a thing or two about the market to count on the skill and expertise of fund managers but a little knowledge about the markets can surely make a difference. Learning about market capitalization and its categories will help us take advantages of sizeable investment opportunities more than ever.

Market capitalization and its categories

Simply put, market capitalization (also known as a market cap) is the market value for publicly traded outstanding shares of a company. It is the product of stock price per share of a company and its outstanding shares. It serves as a factor to the public in determining a company’s net worth. Companies trading publicly are classified into three market cap categories: Large-cap, mid-cap and small-cap.

  • Large-cap stocks: Companies in the market which is worth $10 billion and above are known as large-cap stocks. Large-cap companies which is worth $200 and above qualify as Mega large-caps. The investor benefits with capital appreciation and steady growth of the funds in the long term. Typically, large-cap companies are the ones featured in NSE Top 100 companies.
  • Mid-cap stocks: Companies with market caps between $2 billion to $10 billion. Long term investments in mid-cap stocks are considered as profitable as the fund grows in size with the involvement of more investors.
  • Small-caps stocks: Companies that worth less than $2 billion market caps are known as small-cap These are newly established companies with tremendous potential for growth. Small-caps typically underperform large-cap stocks during recessions but are quick to match up to the investors’ expectations in a good way as an economy emerges from recession. Small-caps may be further classified into micro-cap stocks and nano-cap stocks.

Investing in market caps: What to expect

Due to the strong market presence of Large-cap companies, investors with low risk-appetite tend to be more inclined towards them. Investing in a large-cap company one must home in for a long-term investment horizon to reap the maximum benefits out of the same. Large-cap funds make an ideal investment for investors looking for capital appreciation and regular dividends. Large-cap stocks assure the investor of stability in times of an economic downturn. On the other hand, mid-cap and small-cap funds reflect sky-high growth in Assets Under Management owing to returns at a striking rate in recent years. Speaking of the future, experts believe that mid and small-caps may not yield as much but suggest including the funds in the portfolio, especially if the investor considers a mid-term horizon.

Perhaps, yields from a particular investment have less to do with the volatility of the fund as it all comes down to the tenure of investment. In any case, patience and diversification is the key to a lucrative investment.

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