Friday, May 6, 2016

Investment Essentials: Market Cap

Stock can be classified further than simply growth, value, etc. Most of the time, they are also classified by their market capitalization. It's a fancy term that means size. If you ever hear someone talking about a large cap or a mid-cap or even a small cap, this is what they are referring to.

A large-cap stock is a stock in a company that is worth over $10 billion. These are generally harder stocks to get a piece of for a value because they are generally stocks of well-known track record proven companies. Most believe that because a company has been around for a long time and because they are a large-cap, they are unsinkable. However, one only need remember the history of the Titanic to know that there is no such thing as unsinkable. I would however argue that they are harder to kill than a small-cap.

A mid-cap is a stock of a company that is worth anywhere between $2 billion and $10 billion. There are numerous mid-caps that I have on my radar because they are typically upcoming companies. They have yet to really reach the full potential of a large-cap but they can still be found at lower prices. It's not a firm rule but I find it to be true more often than not.

Lastly, there are small-cap stocks. These stocks have a market cap of $300 million to $2 billion. This is where the money is made. Where large-cap stocks have a hard time moving quickly upwards in price, small-cap stocks can double in price almost over night if they have a good quarter of earnings. This can go the other way as well though. Small-cap stocks can turn over and go belly up rather quickly if they report bad earnings. Anything smaller than small-cap is known as a micro-cap.

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