In the previous Bite, we talked about buying multiple eggs to diversify our portfolio. Having a variety of sizes of eggs is important as well. The size of an egg or stock is based on its market capitalization or “market cap”.
Market cap refers to a company's total market value expressed as a dollar amount. The larger the number, the larger the market cap. To classify companies, they are typically grouped into three levels of market cap: Large-cap, Mid-cap, and Small-cap.
Large-cap stocks contain some of the largest companies in the world. These companies will often range from $10 billion to $200 billion. Anything beyond $200 billion is considered mega-caps. Examples of large and mega-cap stocks would be Mcdonald's, Netflix, and Google. Most well-known companies are considered large-cap or blue chips because of their reliability.
Mid-cap stocks are in the middle of the market and are considered to be growth stocks. These stocks' market cap’s span from $2 billion to $10 billion. Most of these companies are not market leaders in their industry and you may have never heard of them prior, but they are on the rise!
Small-caps range from $300 million to $2 billion and anything below is considered micro caps. These stocks come with some additional risk due to their youthfulness. They are young companies that have potential for appreciation. Netflix was a small-cap stock just 15 years ago (2006) and today is worth $270 billion.
Knowing the difference between these market caps can help you construct a more diversified portfolio or compare the worth of two companies. Each company’s market cap can be easily found with a Google search, but if you ever need to calculate it, it is simply the product of the market price and shares outstanding.
Market Cap = Market Price x Shares Outstanding
What class of stock are you most interested in investing in? Large-cap, Mid-cap, Small-cap? While you are thinking about that, let’s move into dividends.