Monday, October 8, 2007

What Small, Medium and Large Cap Stocks Mean To You

Stocks can be classified in terms of their size, small, medium and large cap stocks. Capitalization can be referred to as the market value of the company. We derived the market value of a company by multiplying market price of stock by the number of outstanding shares.

Large cap stocks refers to stocks of large companies with considerable earnings and large amount of common stocks.
Large cap stocks refers to companies that are listed on the Dow Jones Industrial Average and S&P 500 index.
Examples of such companies include IBM, Intel and Microsoft.
Large cap companies have a market capitalization of more than $5 billion Large cap stocks are often overpriced and over speculated.
These companies usually pay higher dividend, the prices of stock are generally less volatile and the prices of these stocks have less growth rate. This is of course with the exception of internet companies like Google who is in an industry which is extremely volatile.

Medium cap companies have a market capitalization of $1 billion to $5 billion Medium cap companies usually contain a lot of potential and often overlooked my many investors.

Small cap stocks refer to stocks of small companies with a market capitalisation of less than $1 billion.
Small cap companies are new companies who are just starting out on being listed on the stock market and generally tend to have a faster growth rate but also can be a lot riskier. They tend not to pay dividend but have a faster growing rate.

As one goes up the capitalization chart, prices of stocks will be higher and the risk will be lower. Small cap stocks > Medium cap stocks > Large cap stocks

A risk adverse investor will generally spread the investment across the three cap of stocks, small, medium and large cap to reduce the risks. If you expect higher returns and willing to take more risk, the best bet would to be investing in small and medium cap stocks. The safest bet is definitely the medium cap companies which have huge potential for growth and moderate risk levels.

ETF funds that track the performance / index of all small, medium and or cap companies might be of interest to you. An example for an index fund that tracks the performance of large cap companies is SPY. An example for medium cap companies is MDY and for small cap companies is IWM. Due to the popularity of such index funds, the index fund companies have been reported to charge very high rates. With the popularity of ETF funds, these fund management companies are increasing their management fees for ETF funds. Spend some tie researching at and you will be able to find other ETF fund companies other than that of SPY, MDY and IWM that offer significantly lower fund management rates.

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