Should I invest in small cap or large cap stocks?
If you’re building your investment portfolio, you will research various companies with a market cap. One common argument is that small cap stocks offer higher returns than large caps because they have more capacity to grow. However, being smaller makes them vulnerable to economic shocks. In this article, we explore the differences between small and large caps, how both impact investment return and the implications for your portfolio strategy. We hope you find this content helpful, and please get in touch if you’d like to discuss your financial plan with us.The definition of small & large caps
Generally speaking, both small and large caps are publicly-traded stocks. The word “cap” refers to the “market (cap)italisation” of the stocks. Market cap is the value assigned to a company on the stock market. You can calculate this by multiplying the current share price by the total number of shares.How are companies’ stocks valued?
At the time of writing, Amazon has a market cap of $1.82tn (share price of 3,580.41 x 507,150,000 shares is about $1.82tn). Which is an exceptionally high market cap – placing Amazon firmly in the “large cap” category. If a company’s share price goes down, its market cap will also fall (due to the calculation above). When you hear news about a company “losing X amount from its market value”, it can mean that a stock moves from a large cap to a small cap. The critical thing to remember is that a “large cap” company does not necessarily mean that it offers higher returns. Indeed the opposite is often true.The difference between small-cap stocks & large-cap stocks
To keep it simple, we’ve highlighted the main differences between the two.Large-cap stocks:
- Companies valued above $10 billion
- Typically more stable
- Less potential for fast growth
- Pay dividends
Small-cap Stocks:
- Companies valued between roughly $250 million and $2 billion
- Usually more volatile
- Potential for significant growth in short-term
- Unlikely to pay dividends