A quick guide to market caps
E*TRADE from Morgan Stanley in collaboration with Morgan Stanley Wealth Management09/30/21
Summary: A company’s market capitalization, or its market value, can help investors decide if the stock is a good fit for their portfolio. Learn how to calculate a market cap and the features of different market caps.
Market capitalization, commonly called market cap, is the total market value of a publicly traded company’s common stock. Knowing a company’s market cap is helpful for gauging risk and return potential relative to a company’s size.
E*TRADE customers can see a ticker’s current market cap on the Snapshot view of the Quotes page, but it can also be found using a simple formula. To calculate it, multiply the current stock price by the number of shares it has outstanding:
Stock price x # of shares outstanding = market capitalization
For example, a company that has a stock price of $35 with 10 million shares outstanding has a market cap of $350 million. If that company’s stock price rises to $40, then its market cap would rise to $400 million. If its stock price falls to $30, its market cap would then be $300 million.
Let’s look at some of the features of different market caps.
Micro and small caps
Small-cap companies generally have a market capitalization of $300 million to $2 billion. They tend to be domestic companies focused on niche markets or new, rapid-growth industries. Small-cap companies usually look to grow their business, offering investors long-term growth potential. Investors may look to small caps for portfolio diversification, since they don’t always move in lockstep with the broad market. That said, small-cap stocks carry more risk than mid- and large-cap stocks. When the economy is doing well, small caps can often outperform the market, but in periods of economic stress, they can experience significant volatility. Investors who are willing to take on more risk for potential future returns may choose to incorporate small caps into their portfolio.
It’s worth mentioning that small caps have a subsegment called “micro caps,” which tend to range between $50 million and $300 million in market capitalization. Their features are similar to small caps, but micro-cap stocks can be even more volatile.
Mid-cap companies typically have a market capitalization between $2 billion and $40 billion. They tend to be bigger and more established firms than small caps, but still have a runway for growth and expansion. Mid-cap stocks can provide a mix of stability and growth potential, and often fall between small caps and large caps on the risk-reward spectrum. Mid-caps may offer higher returns than large caps and are generally viewed as less risky than small caps. Mid-caps still come with volatility and liquidity risks, so investors should make sure to do their homework.
Large and mega caps
Large-cap companies usually have a market capitalization between $10 billion and $200 billion. Large caps are commonly well-known, mature brands that operate in many countries and serve a variety of markets. Investors may incorporate large caps in their portfolio because of their consistent performance or steady dividend payments. For these reasons, large-cap stocks are typically seen as more conservative investments—offering less growth potential than other market caps, but also the least amount of risk.
Mega cap is another segment of large caps. They generally have similar characteristics but represent behemoth companies with market caps of $200 billion or more.
Market caps at a glance
Incorporating market caps into portfolios
Investors looking to create a diversified portfolio may allocate their investments across different market caps, sectors, and industries. The right mix will depend on an investor’s financial situation, including their personal goals and risk tolerance.
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