What Is Large Cap vs Small Cap?

Stocks are put into different categories based on their market capitalization. It’s calculated by multiplying the number of outstanding shares by the stock price. Categories range from nano-cap, which are the smallest companies to mega-cap, which are much larger companies. In today’s market, investors can make a profit even when investing in smaller cap stocks. Which stocks have performed the best over time? Large cap vs small cap? Let’s find out!

Defining Market Caps

Large Cap vs Small Cap
  • Nano-cap: Under $50M
  • Micro-cap: $50-$300M
  • Small-cap: $300M-$2B
  • Mid-cap: $2-$10B
  • Big-cap: Over $10B
  • Mega-cap: Over $200B

Large cap vs small cap values above has changed over time due to the growth of stocks. A big-cap stock in the ‘80s is considered a small-cap stock today.

It’s important to note that these values are not fixed and will change over time. The majority of companies fit in the small to the mid-cap range.

Smaller stocks have the potential to grow and fall at a much faster pace than larger ones. In fact, with increased volatility comes more risk.

They’re not necessarily at the start-up phase of the business. Most small-cap stocks have been in business for a long time and their brand is well recognized. 

Let’s take AMC Entertainment Holdings Inc (NYSE: AMC) as an example. They are a multinational movie theatre chain that has been around for decades.

Due to the pandemic, the business has been slow to recover. Their market cap is currently under $10B and has been a roller-coaster over the last few years. Less than two years ago, they were considered a small-cap stock.

However, six months ago, they were a big-cap stock. This demonstrates that in today’s economy, certain markets are more vulnerable than others. Investors can be bullish one day and extremely bearish the next.

Larger-cap stocks may grow at a slower pace, but they tend to be more stable. They are also likelier to pay dividends. Smaller-cap stocks usually earn fewer profits and aren’t able to pay their shareholders quarterly. It’s more reasonable to keep the funds to expand the business and please the shareholders in the future.

Blue Chip Stocks

Blue-chip stocks are known to be historically solid multinational companies from different industries. They’ve had consistently strong earnings, financials, and leadership. Oftentimes, they pay dividends. Today, reliable blue-chip stocks include the following:

  • Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT)    Big Tech
  • Berkshire Hathaway (NYSE: BRKA or BRKB)                           Multinational Conglomerate
  • Coca-Cola (NYSE: KO)                                                            Beverage
  • Visa (NYSE: V) and MasterCard (NYSE: MA)                           Financial Services
  • Lockheed Martin (NYSE: LMT)                                                Aerospace/arms
  • Walmart (NYSE: WMT)                                                           Retail

We can’t put a blanket over all big-cap stocks. They are not bulletproof and can fall. Meta Platforms Inc (NASDAQ: FB) recently recorded the biggest single-day loss in market history. FB is a mega-cap stock that lost over $200B in one day on Friday, February 4th. That was a 25% decline. This is also part of a loss of almost 40% over the last 6 months. 

Another unforgettable example is Enron. The ex-energy giant filed for bankruptcy in December 2001 for over $60B. The company’s management used fraudulent accounting to hide losses and increase revenues. After the fraud was uncovered, their stock plunged from $90 to $0.26. In the following months, fingers were pointed, but ultimately, the shareholders were the ones who suffered.

What’s the lesson so far? Do your own due diligence. Large cap vs small cap. Every company out there can fraud the system, no matter how big they are. There’s always a smaller company in the same industry that can achieve great things in the future.

Small Cap or Large Cap?

Large Cap vs Small Cap

Large-cap stocks tend to be part of more indexes and funds than their smaller counterparts.

Multinational corporations tend to fall under more than one market. Let’s take Amazon as an example.

This mega-cap can fall under software, entertainment, e-commerce, and many other categories.

Hence, it is much more popular and fits in many indexes. Small-cap stocks are part of indexes and funds where they are often grouped together.

Additionally, they are not as popular, or stable.

Big investors tend to switch their holdings depending on market conditions. 

Let’s take a look at how stocks from large cap vs small cap categories have performed during uncertain times in the past.

2020-2021

During the first five months of 2021, small cap stocks did much better than their larger counterparts. However, by the end of the year, larger-cap stocks came out on top. What was the reason behind this reversal? 

In the picture below, small cap stocks are in green, mid cap in orange, and large cap in purple. So who did better? Large cap vs small cap.

Large Cap vs Small Cap

At the start of 2021, there seemed to be less risk worldwide. Vaccines became more available, interest rates were low and the world seemed to come back to life. This was a good recipe for smaller companies to make a comeback. Investors flooded their funds to riskier assets.

As the year progressed, uncertainty increased. Chinese firm Evergrande was on the verge of defaulting. COVID’s long-term effects started to show. Inflation began rising. Supply-chain operations were disrupted.

Finally, the highly contagious Omicron variant spread fear worldwide. Bigger companies tend to fare better during a more difficult economic period. Investors abandoned riskier investments and moved their money to relatively safe stocks. In other words, money moved from small-cap stocks to large-cap stocks.

During the last 2 years, when markets were deemed low-risk, investors shifted their funds to small-cap stocks with high growth potential. When markets were riskier, investors transferred their funds to fixed-income and to Large-cap stocks.

2000-2002 & 2008-2009

After the Dotcom Bubble (2000-2002)  and the Global Financial Crisis (2008-2009), small cap stocks outperformed large cap stocks in the following 3 years by 42% and 32% respectively.

Currently, we are not exactly in a recession, but small-cap stocks did take a hit recently. Are past recoveries a glimpse into the following months? It seems that restrictions are once again fading and the next months may be bullish.

We still have unresolved questions about a war with Russia, inflation, and the supply-chain operations, but major investors may overlook these fears when looking at large cap vs small cap stocks.

Large Cap vs Small Cap Final Take

It’s always hard to predict the course of the stock market, but certain indicators lend us a hand. Worldwide markets will bounce back once various issues sort themselves out. It may be wise to diversify our portfolios between large cap vs small cap stocks to avoid any unpleasant surprises.

It seems to me that smaller companies have a huge potential to grow in the upcoming months. How much bigger can Amazon, Google, Microsoft, Apple, and others get?

Large-cap stocks will often pay investors dividends and grow steadily. Small-cap stocks will take investors for a ride and are much less predictable over the long term. High risk leads to high rewards. The important thing is to remain informed about worldwide market conditions.

If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.

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