Question: You've written about different financial terms in the past, but you haven't explained the various sizes of the "caps," such as midcap.

E. Andersen

Answer:

Dear E. Andersen,

You're right...that is a topic we haven't discussed. A company's size (or market capitalization) is something to consider when purchasing stocks. We'll begin with how size is officially determined...

Market capitalization. The size of a company -- in Wall Street terms -- is based on the total value of all of a company's outstanding shares. Market cap (or value, as it is also called) is calculated by multiplying the market price per share times the total number of outstanding shares. For example, a company with 100 million outstanding shares, selling at $25 per share, has a market cap of $2.5 billion.

Large-cap. These are companies with market capitalization of more than $5 billion. They are not only generally familiar to investors but are also widely covered by the media and brokerage firms. It's safe to say that although their prices may be high, they are usually (but not always) well-run and successful. (Although Enron certainly was not!)

Mid-cap. These are midsize companies with a market capitalization of less than $5 billion but more than $1 billion. The potential for growth among the mid-caps is generally greater than for large-cap companies.

Small-cap. These are small companies with a market capitalization of less than $1 billion. Prices of small-cap stocks tend to be volatile.

Micro-cap. This is a subcategory within the small-cap group. Micro-cap companies have a market capitalization of less than $300 million. Micro-caps offer investors the possibility of big returns, but along with that potential comes a high degree of risk. It's not unusual for these stocks to rarely be mentioned in the media - or at least not until their prices start to move up dramatically.

You should also be aware of the term value stocks. These are stocks selling at low prices that are also considered to be out of favor (at least temporarily) with Wall Street professionals and investors. A value stock is most likely to fall within the small-cap or micro-cap categories. Mid-cap and large-cap stocks are rarely value stocks.

The phrase equity-income stocks refers to stocks that bring investors both income and growth. The income coming, of course, from dividends and the growth from price appreciation. Most equity-income stocks are large-cap although they can also be found among some of the mid-cap companies.

You might want to read a previous column on sources (books and the Internet) that explain various investing terms and concepts. Click HERE.

Good luck!