The meanings of "big cap" and "small cap" are generally understood by their names: big-cap stocks are shares of larger companies and small-cap stocks are shares of smaller companies. Labels like these, however, are often misleading. If you don't realize how big "small-cap" stocks have become, you'll miss some good investment opportunities.
Small-cap stocks are often cited as good investments due to their low valuations and potential to grow into big-cap stocks, but the definition of small cap has changed over time. What was considered a big-cap stock in 1980 is a small-cap stock today. This article will define the "caps" and provide additional information that will help investors understand terms that are often taken for granted.
First, we need to define "cap," which refers to market capitalization and is calculated by multiplying the price of a stock by the number of shares outstanding. Generally speaking, this represents the market's estimate of the "value" of the company; however, it should be noted that while this is the common conception of market capitalization, to calculate the total market value of a company, you actually need to add the market value of any of the company's publicly traded bonds.
The Big Boys
Big-cap stocks refer to the largest publicly traded companies like General Electric and Walmart; these are also called blue chip stocks. "Big" has also been believed to have less risk while "small" has implied more risk, but, as evidenced by Enron, this is not a good assumption to make. It is true, however, that the bigger they are, the harder they fall.
The definition of big/large cap and small cap differ slightly between the brokerage houses and have changed over time. The differences between the brokerage definitions are relatively superficial and only matter for the companies that lie on the edges. The classification is important for borderline companies because mutual funds use it to determine which stocks to buy.
The current approximate 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 increased over time along with the market indexes. In the early 1980s, a big-cap stock had a market cap of $1 billion. Today that size is viewed as small. It remains to be seen if these definitions also deflate when the market does.
The big-cap stocks get most of Wall Street's attention because that is where the lucrative investment banking business is. These, however, represent a very small minority of publicly traded stocks. The majority of stocks are found in the smaller classifications, and this is where the values are. Below is a breakdown of the percentage of stocks in each cap category. This the actual number changes, but the percentages stay more or less the same. There were 17 mega cap stocks in 2007, but that number shrunk to less than five by 2010 due to the 2008 mortgage meltdown and the Great Recession.
The big and small labels are also attached to the major stock exchanges and indexes, which also leads to confusion. The Dow Jones Industrial Index is viewed as consisting of only big-cap stocks while the Nasdaq is often viewed as being comprised of small-cap stocks. These perceptions were generally true prior to 1990, but have since changed. Since the tech boom, the market caps of the stock exchanges and indexes vary and overlap. The average market cap for the Dow, however, remains much larger than the average market cap for the Nasdaq 100.
The Bottom Line
Labels such as big and small are subjective, relative and change over time. Big does not always mean less risky, but the big caps are the stocks most closely followed by Wall Street analysts. This attention, however, generally means that there are no value plays in the big-cap arena.
Mutual Funds & ETFsFind out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
Mutual Funds & ETFsFind out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
Mutual Funds & ETFsTake a close look at the Vanguard Small-Cap Growth ETF, which focuses on domestic small-cap equities with a fundamental growth strategy.
Mutual Funds & ETFsTake a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
Technical IndicatorsThinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
Trading StrategiesAlthough penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
Mutual Funds & ETFsDiscover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
Mutual Funds & ETFsLearn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
Mutual Funds & ETFsFind out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
Mutual Funds & ETFsFind out about the PowerShares DWA SmallCap Momentum Portfolio ETF, and explore detailed analysis the fund's characteristics, suitability and recommendations.
Companies that have had an increase in dividends for 25 consecutive ...
A securities act enacted in 1990 that sought to clamp down on ...
A term coined by portfolio manager John Schwinghamer to describe ...
A stock index that tracks the shares of the top-performing publicly ...
A formal gauge or measure of the performance of a selected group ...
A former price-weighted index that represented Germany's top ...
Small-cap companies generally yield a higher average return than large-cap companies. In February 2015, the Wall Street Journal ... Read Full Answer >>
Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
Most reverse stock splits are undertaken by small, micro penny stocks that need to maintain the minimum price requirements ... Read Full Answer >>