Market capitalization, also known as market cap is the total market value of a publicly-traded company. It is calculated by multiplying the share price with the total outstanding shares of the company. For example, if a company has issued 10 million shares and its share price is $100, then the market cap is $1 billion.
Market cap helps investors to decide a company’s size which can be an important aspect to consider while investing. The size of a company can tell you a lot about what one should expect while buying their stocks.
Companies are classified on the basis of their market caps as large-Cap, mid-cap, and small-cap. All three categories have their own perks and it helps investors to create a balanced portfolio.
Let’s take a look at each of these classifications and what it means for the investor.
Large-Cap stocks are companies with a market cap of over $10 billion. Generally, organizations that are market leaders with a huge presence and an easily identifiable brand are large-cap companies.
These companies generate stable cash flows and have strong balance sheets. Large-cap stock investments should make the core of an investor’s portfolio. According to MotleyFool, the basic philosophy of buying great companies at good prices is of primary focus when it comes to investing in large-cap stocks.
Large-cap companies are considered safe investments, though this does not totally eliminate the risk factor. They are considered safer because they are stable and well-established in the market. Further, taking a long-term in these stocks might give you great returns with significantly lower risks.
Another advantage of investing in large-cap stocks is that several companies offer their investors consistent dividend payments. Since the companies have surplus cash, they pay out dividends on a monthly or quarterly basis to investors for holding their stocks.
These stocks are not immune to recessions; however, they have the potential to get back on their feet slowly but surely after a downturn. Often, large-cap companies acquire small- and mid-cap companies of their industry who have potential but incapable of surviving the market or to eliminate competition altogether.
Canada’s top large-cap companies include Shopify (TSX:SHOP)(NYSE:SHOP), Royal Bank of Canada (TSX:RY)(NYSE:RY), Toronto-Dominion Bank (TSX:TD)(NYSE:TD), Canadian Natural Railway (TSX:CNR)(NYSE:CNQ) and Enbridge (TSX:ENB)(NYSE:ENB).
Companies that are valued at a market cap of between $2 billion and $10 billion are considered mid-cap stocks. According to Investopedia, some investors look at mid-cap stocks as a way to diversify risk as unlike small-cap stocks that provide growth potential and large-cap that provide stability, they represent a hybrid between the two.
So, holding these stocks in your portfolio in turn provides a middle ground between growth and stability. While stocks in the mid-cap category are riskier than large-caps, they also offer higher growth potential.
Some of Canada’s largest mid-cap companies include marijuana heavyweight Canopy Growth (TSX:WEED)(NYSE:CGC), retail giant Canadian Tire, gold mining stock B2Gold, utility majors Canadian Utilities and Northland Power.
Small-Cap stocks are companies with market caps between $300 million and $2 billion. Small-cap companies are very young meaning the stocks have a high potential for growth and returns which indicates they carry significant risks compared to their large-cap and mid-cap counterparts as you are betting on the future potential of these firms.
According to thebalance, small-cap companies have a simple organizational structure, allowing them to make decisions faster and they can change direction in time to take advantage of shifts in the economy.
Often small-cap companies have an aim to end up as an industry giant and some even manage to do so. Early investors of such companies might generate returns that are often hard to imagine but more often than not most small-caps fail to achieve this.
Further, during a financial crisis, they may not have the resources and cash reserves to sustain a downturn making them vulnerable.
Investors require a lot of patience and may have to face significant volatility in these stocks. However, the returns they produce are generally worth the wait.
The Bullish verdict
We can see that investing in each of these companies has its own set of advantages. Ideally, you need to majorly have a portfolio of quality large-cap stocks that account for a majority of your investments.
You can also invest in ETFs that are market-cap specific which will give you access to multiple companies and lower your risk exposure.