Market Capitalization – Why Size Does Matter

Market Cap

 

Large cap, small cap, mid cap…you’ve probably heard these terms used before when someone has mentioned a stock. But what’s the difference between a small cap company and a large cap stock? What exactly is ‘cap’ for that matter?

 

Cap is short for Capitalization. Market capitalization is really a basic concept at it’s core. It’s simply the current stock price multiplied by the number of outstanding shares. The number is always displayed as a dollar amount.

 

For example, as I write this, Apple’s current market capitalization is $571.3B. That’s ‘b’ for billion. With the most recent price of the stock at $94.74 as of August 2014 and 6.03 billion shares outstanding, doing the math gives us the current market cap.  $94.74 x 6.03B = $571.3B (Current stock price x number of shares outstanding = Market Cap.).

 

Is Bigger Better?

 

One thing to get clear before we go any further is that two stocks with different prices can have the same or similar market cap. You may be thinking that if two stocks have the same market cap then the one that has a higher stock price has to be better…right?

 

Not necessarily.

 

If one stock is trading at $100 and the other is trading at $10, you’d have to look at each company individually before you decide which is better for you. The $100 stock could have recently done a reverse stock split, where for every 10 shares you had, you now have one. Meaning that if you had 10 shares worth $10 each, you would now have one share worth $100.

 

In that scenario both companies have similar market caps because they have changed how many shares are outstanding. (Outstanding shares are how many shares a company has available for trading)

 

Should you only buy large cap stocks and avoid small caps? There is definitely money to be made with stocks of any market cap size. Often people miss opportunities because they think that small cap stocks might not be good companies to buy.

 

Small, Medium or Large?

 

With all this talk of size, how do you know how big a large cap stock is compared to a small cap? So glad you asked. Let’s break down each category so you know exactly where a particular stock would fall.

 

Micro Cap. These stocks have a market cap of between $50 million and $300 million. These are not necessarily risky companies. They may have either been bigger companies in the past or are a growing stock. Companies with a market cap of under $50 million are nano cap stocks. Nano cap stocks typically include penny stocks, or stocks that trade under $1.00 per share.

 

Small Cap. Stocks that fall between $300 million and $2 billion classify as small cap companies. It’s interesting to note that a company with a market capitalization of $1 billion could still be considered a small cap stock.

 

Mid Cap. This is where is starts to get interesting. A mid cap stock’s value ranges from $2 billion to $10 billion. Equifax (EFX) and E-Trade Financial (ETFC) are two current examples of mid cap companies.

 

Large Cap. These are not companies that just arrived on the scene yesterday. The large cap spectrum goes from $10 billion to $200 billion. Alcoa (AA) and Michael Kors (KORS) are currently two large cap stocks.

 

Mega Cap. I know you were waiting for this one. Here is where you’ll find the Microsofts and Googles of the world. In order to be considered a mega cap stock, the company has to have a market capitalization of over $200 billion. If you want to see a list of all of the mega cap companies, check out the list here on Finviz.

 

I’ve mentioned Finviz.com on the site before. You can easily get a list a stocks for each market cap category at Finviz. For this you are going to go the screener. The screener simply lets you sort through the thousands of stocks that exist by entering in various criteria.

 

From the homepage on Finviz.com, click on the Screener tab in the menu at the top of the site. It’s the third menu item from the left.

 

Once you’re in the Screener tab you’ll want to look right under the top menu to the filters section. Finviz has the filters categorized into four sections; Descriptive, Fundamental, Technical and All. Breaking it down this way helps you not to be overwhelmed by all of the choices you have to narrow down your stock selection.

 

By default you will arrive on the Descriptive filter. This is where you should be in order to sort by market cap. In the column on the far left of the screen you will see three choices; Exchange, Market Cap. and Earnings Date. For now you should select Market Cap. The drop-down menu gives you all of the categories we discussed above but presented in a couple different ways.

 

Finviz Market Capitalization

 

As you can see from the screenshot above, the first six choices are the same groupings of market caps that were discussed earlier. Choosing any of these will give you only those stocks that fall within that particular range.

 

The other choices have either a plus (+) or minus (-) next to them. Everything with a plus will give you stocks with that particular market cap and higher. Items with a minus next to them will show you the selected market cap and lower.

 

So now you should have a better understanding the next time you hear someone mention they just bought a large cap stock. How do you use market capitalization to pick your stocks? I’d love to read your comments below.

                                                                   

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