When working with people to set up and handle their U.S. brokerage accounts (including IRAs, joint and custodial accounts), we’ll often consider “market capitalization,” or “market cap,” which refer to the size of a company. Investing in different size companies carries different levels of risk and potential for growth and dividends.
Large-cap stocks usually refer to companies with a total market capitalization of over $10 billion. These well-established firms have familiar names and they trade on the major exchanges. Their massive size can cushion them from the volatility associated with smaller firms. They do not constantly focus on growing larger through new undertakings, but instead aim to grow more profitable by expanding and servicing markets for their existing product lines.
Mid-cap stocks are often newer, but still established companies with market capitalization in the $2 billion to $10 billion range. They proved themselves capable of meeting their customers’ needs, but in an effort to grow and achieve greater success, may choose to assume additional risk. While many companies remain in the midcap category and provide returns for their shareholders, others choose to enlarge their scope and join the large-cap group.
Small-cap companies have market caps ranging from $300 million to less than $2 billion. This group generally includes businesses in the startup phase. These firms hunt for ways to raise money, expand production, and hopefully forge ahead in the field. Investing in these companies is more speculative than investing in medium- or large-cap enterprises.
As company size clearly affects the level of risk and other factors, it’s important to know the market capitalization of a company before investing in it, to make sure the company risk and return models match your asset allocation target and risk tolerance. If you have any questions about your asset allocation, contact Profile Investment Services. We would be glad to help you.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published June 22, 2015.