Stocks are divided into one of three categories according to their market capitalization (cap). The market cap for a company is calculated by multiplying the company's stock price by the number of shares outstanding.

For example, a company whose stock is selling for $5 per share and has 1 million shares outstanding, has a market cap of $5 million. If the stock is selling at $50 per share and it has 10 million shares outstanding, then the market cap would be $500 million.

Although the exact ranges for the three different categories varies somewhat depending upon the source, here are the generally agreed upon dollar amounts:

• SMALL-CAP COMPANIES. Those that have a market cap of $1 billion or less. These tend to be new or emerging companies. They offer above-average growth potential but at the same time, come with above-average risk.
  
  
• MID-CAP COMPANIES. Those that have a market cap ranging from $1 billion to $5 billion. These tend to be more established companies. They offer less growth potential than small-cap companies, but also less risk.
  
  
• LARGE-CAP COMPANIES. Those that have a market cap above $5 million. They often go well into billions of dollars. These tend to be very well established companies, including the big blue chips and companies that are in the Dow Jones Industrial Average. They offer moderate to strong growth potential and just moderate risk.
  

Indexes...

There are various indexes that measure the overall performance of stocks in each capitalization group. The most commonly followed are the Standard & Poor indexes:

1. The S&P MidCap 400 Index
   
2. The S&P SmallCap 600 Index
   
3. The S&P 500 Index which tracks large-cap companies.

You'll find descriptions of each of these indexes as well as news about any changes made within an index at: www.standardandpoor.com.

In mid-December, for example, Fairchild Semiconductor (FCS) replaced Diamond Shamrock (UDS) in the MidCap 400 Index, while Veeco International (VECO) replaced Anchor Gaming (SLOT) in the SmallCap 600 Index.

MORE INFO:

• The Russell Indexes: www.russell.com
• The Wilshire Indexes: www.wilshire.com
• You might want to read an excellent book on the topic, Profiting From IPOs and Small Cap Stocks by Norman Brown; published by the New York Institute of Finance.
  

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for informational purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.