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Answer:
Dear
Gerald,
Good question...Capitalization, sometimes called cap, is a measurement that classifies the size of various publicly traded companies. Specifically, it refers to the market value of a company based on its outstanding shares.
Let’s say that Company XYZ is selling at $20 per share and has 1 million shares outstanding, then its market cap is $20 million ($20 x 1 million shares).
By classifying companies into different caps, you can compare them using the growth versus risk factor -- on the whole, large-cap stocks grow more slowly, but generally with not as much risk as say, small-caps which tend to grow rapidly but with a higher risk factor.
Different Types of Capitalization
It’s important for your investment club to realize that the definition of market cap is not set in stone. For example, on the website of the American Stock Exchange (www.amex.com), a large-cap stock is defined at more than $2 billion. But that was written back in 1999. More recent definitions put it at $5 billion; you’ll find some sources saying $8 billion. It all depends upon who is doing the defining, how the market is performing, and the overall state of the economy.
So, I wouldn’t worry too much over the shifting definitions (the definitions also vary among brokerage firms and financial institutions). And because there is no one definitive rule regarding the numbers, it’s best to view market cap as one of several ways to study stocks, keeping in mind that a market cap will change each day, as long as the price of the stock changes.
Here are some general guidelines...
Mega-cap: Companies that have a market cap of $200 billion or more. These are our largest publicly traded companies and tend to be the leader or leaders within their industries, although this is not always the case.
Large-cap: Companies that have a market cap between $5 billion to $200 billion. These well known companies are basically regarded as stable.
Note: You’re probably familiar with the term blue chip stocks. They are made up of mega- and large-cap companies and very often pay dividends.
Mid-cap: Companies that have a market cap between $2 billion to $5 billion. Although often more volatile in price than the above two categories, many mid-cap stocks are growth stocks.
Small-cap: Companies that have a market cap between $250 million and $2 billion. These are generally newer companies and obviously smaller. Here you’re likely to find companies that may grow rapidly – yet that appreciation also comes with a greater risk factor.
Micro-cap: This category, also known as penny stocks, has companies with market caps between $50 million and $250 million. Investment clubs tend to avoid these high risk stocks. An even higher risk category, the Nano-caps, consists of stocks that trade on the pink sheets or OTCBB.
The Caps & The Indices
There are a number of indices that represent various caps. The most well known for large-caps, for instance, is the Standard & Poor 500. As we go to print, to make it into the S&P 500, a company must have a market cap of over $5 billion.
The S&P Mid-Cap 400 Index contains companies with market caps between $1.5 billion and $5.5 billion.
And, the S&P Small-Cap 600 Index is made up of companies with market capitalization between $300 million and $2 billion.
To keep up to date on the market cap requirements and the changing components of the S&P indexes, go to: www.indices.standardandpoors.com.
Other indexes you should look at for definitions of market caps and also for the names of component stocks are those published by Russell Investments (www.russell.com) and Wilshire Associates (www.wilshire.com).
Good luck!
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