Small and large-cap stocks are two of the groups that measure the size of a company. Cap is a term used to define a company’s market capitalization. Also known as market cap, the figure is a number calculated by multiplying how many shares of a company’s stock are outstanding by the price of the stock.
Large Cap Examples
For example, in early 2019, Apple reached a market capitalization of $1 trillion. Google has a market cap of around $600 billion, and Amazon.com has a market cap of around $800 billion. These companies are referred to as large-cap stocks. However, most investors consider companies with market caps of $10 billion or more as large-cap stocks.
Why Invest in Large-Cap Companies
Most investors who buy large-cap companies are looking for long-term yields. Many people think of larger companies as slow growers who consistently produce returns over time. Although companies like Amazon and Google appear to grow rapidly, it has taken them years to turn into large-cap companies. A prime example is Apple. In early 2004, Apple stock was worth approximately $4 per share. It took the company more than 15 years to establish itself as one of the most dominant companies in the world.
Companies with market caps of $300 million to $2 billion are referred to as small-cap stocks. These companies have smaller market caps because there are fewer shares of stock available to buy and sell. Companies with smaller balance sheets and revenues will offer small amounts of shares to the public. If a company offers more shares than its book value, it will dilute the stock price and hurt the value of the company.
Why Invest in Small-Cap Companies
Investors who are willing to take on more risk for more returns focus their attention on small-cap stocks. Many small-cap companies use aggressive measures to grow their businesses resulting in the potential for healthy returns. On the flip side, aggressive measures can lead to more risk and the potential for losing money. The success of small-cap companies is not certain, but they do have much more room to grow than many large-cap stocks.
One key takeaway is large-cap stocks tend to withstand market volatility better than smaller companies. When market conditions turn south, many investors will put their money in safer investments such as large-cap stocks.