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! For example, Stitch Fix, a personal styling service, has a market cap of $2 billion and is growing quickly.
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 great 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.