Understanding Small Cap and Big Cap Stocks

The Captures of Big Cap and Small Cap are ranked by their names. Big cap stocks — also considered to be large cap stocks — are shares of larger companies. Small cap stocks, on the other hand, are shares of beneficial companies. Labels like these can often be misleading because many people run under the assumption that they can only make money by investing in large cap stocks. And that can't be further from the truth—especially now If you don't realize how big small cap stocks have become, you'll miss some good investment opportunities.

Small cap stocks are considered good investments due to their low valuations and potential to grow into big cap stocks, but the definition of a small cap has changed over time. What was considered a big cap stock in 1980 is now a small cap stock today. This article will define the caps and provide additional information to help investors understand terms that are often taken for consideration.

Scaling Up Stocks
Before we do anything else, we first need to define the word cap—which is short for capitalization. The term in its entirety, though, is market capitalization or market cap. This is the market's estimate of the total dollar value of a company's outstanding shares. To get this figure, you need to multiply the price of a stock by the number of shares outstanding. One thing to keep in mind, though, is that while this is the common conception of market capitalization, you actually need to add the market value of any of the company's publicly-traded BONDS TO CALCULATE THE TOTAL MARKET VALUE OF A COMPANY.

THE MARKET CAP SHOWS THE SIZE OF THE COMPANY, SOMETHING OF INTEREST TO MOST INVESTORS. That's because it affects points out several key factors of a company including its risk assessment. Combining the value of small cap stocks may vary from broker to broker, the general consensus today is that they have market caps estimated from $300 million to $2 billion.

One Misconception People Have About Small Caps is that they are startup companies or are just brand new entities that are breaking out. But this can't be further from the truth. Many of small cap companies are just like their larger colleagues in that they have strong track records, are well-founded, and have great financials. And because they are likely, small cap share prices have a greater chance of growth. This means they have much more potential for investors to earn money faster.

The Big Boys
BIG CAP STOCKS REFER TO THE LARGEST PUBLICLY TRADED COMPANIES WITH MARKET CAPS OF MORE THAN $10 BILLION LIKE GENERAL ELECTRIC AND WALMART. These companies are also called blue chip stocks — companies with a history of dependable earnings, solid reputations, and strong financials. While companies like these tend to perform well and provide safe returns for investors, you can't use this as a blanket for all large caps. Some investors have the misconception that the large cap market comes with much less risk than other, risky stocks because of their value. There have been several cases in financial history that point to the Opposite—Enron is just one example. It argues to believe that the bigger they are, the harder they fall.

The company, which was a darling of the energy industry, was the subject of an accounting scandal. The company used mark to market (MTM) accounting to make the company look like it was much more difficult than it actually was. Its liabilities were estimated money, but the company depended to hide its liabilities and debts, using off-balance sheet entities to mask toxic assets. The Company Buckled, and Ended Up Filing for Bankruptcy. Key personnel, including CEO Jeffrey Skilling and the Company's Accounting Firm faced Criminal Charges.

Ranking Caps
The definitions of big or large cap, and small cap stocks differ slightly between brokerage companies and have changed over time. The differences between the brokerage definitions are superficial and only matter for the companies that lie on the edges. The classification is important for borderline companies because mutual funds use these definitions to determine which stocks to buy.

The current definitions are as follows:
Mega Cap: Market cap of $200 billion and greater
Big Cap: $10 billion and greater
Mid Cap: $2 billion to $10 billion
Small cap: $300 million to $2 billion
Micro cap: $50 million to $300 million
Nano Cap: Under $50 million

These categories have been compared over time along with the market indexes. And it is important to note that these definitions are fluid and not fixed. For example, in several circles, stocks with market caps greater than $100 billion are seen as mega caps. In the early 1980s, a big cap stock had a market cap of $1 billion. Today, that size is smaller. It remains to be seen if these definitions also deflate when the market does.

Shifting Numbers
THE BIG CAP STOCKS GET MOST OF WALL STREET'S ATTENTION BECAUSE THAT'S WHERE YOU'LL FIND THE LUCRATIVE INVESTMENT BANKING BUSINESS. LARGE CAP STOCKS MAKE UP THE MAJORITY OF THE EQUITY MARKET IN THE UNITED STATES, WHICH IS WHY THEY MAKE UP THE NUCLEUS OF MANY INVESTORS' PORTFOLIOS.

Mega cap stocks, on the other hand, tend to shift in numbers. There were 17 of these stocks in 2007, but that number shrunk to less than five by 2010 due to the 2008 mortgage meltdown and the great recession. In 2017 and 2018, mega cap stocks had made a resurgence and behemoths such as Apple (AAPL) had notable historic market cap highs. The total number of mega cap stocks in stock are not available yet for 2019.

But what about small caps? Remember, just because they have a bad market cap doesn't mean you won't find value or great returns. In fact, much of the value in the stock market can be found through small cap stocks because they have some of the most important track records around. Many of them also tend to outperform their large cap peers.

The Bottom Line
The big and small labels are also attached to the major stock exchanges and indexes, which also leads to surveys. The Dow Jones Industrial Average (DJIA) is considered as expensive of only big-cap stocks while the Nasdaq is often considered as being considered of small cap stocks. These perceptions were actually true before 1990, but have since changed. Since the tech boom, the market caps of the stock exchanges and indexes vary and overlap.

Labels such as big and small are relative, and change over time. Big does not always mean less risky, but the big caps are the stocks most likely discussed by Wall Street risks. This attention, however, means that there are no value plays in the big-cap arena.