What is Market Capitalization and Why Does it Matter?

For those unfamiliar, the “market cap” – or market capitalization – of a company is essentially just the size of a company. Let’s break down this topic and talk about why it matters!


Simply put, market capitalization is, “the total dollar market value of a company’s outstanding shares of stock” per Investopedia.

That article, which is a great one to read (I am a huge fan of Investopedia) goes on to break down how a company with 10 million outstanding shares, each valued at $100, would give a company an overall market capitalization of a billion dollars. Pretty cool!

These classifications can vary depending on the source of information, but this is what I generally agree with as far as company size classifications from Indeed:

* Note, examples given are not recommendations, just examples*

Nano-Cap

<$50 Million

Ex. Happiness Biotech Group (NASDAQ: HAPP)

Micro-Cap

$50 Million – $300 Million

Ex. Quotient Limited (NASDAQ: QTNT)

Small-Cap

$300 Million – $2 Billion

Ex. AppHarvest (NASDAQ: APPH)

Mid-Cap

$2 Billion – $10 Billion

Ex. Ambarella (NASDAQ: AMBA)

Large-Cap

$10 Billion – $200 Billion

Ex. Lowes (NYSE: LOW)

Mega-Cap

$200 Billion +

Ex. Paypal (NASDAQ: PYPL)

As of this writing (11/24/21) I do not own any of the above stocks, again these are just examples, not endorsements.

I included links to stock quotes for each example so that you could see the differences in companies of varying sizes (click the example to view). You may have noticed that the first company you probably actually recognized was the large cap example. There are thousands of companies that exist that you can buy stock in, many of which you have likely never heard of, and to me that is extremely cool!

Something else to note, a company’s market cap changes all the time; as often as their price/share changes!

The above companies could be in completely different classifications a year from now.

So why does this matter?

While no rule is true 100% of the time when it comes to investing, it is significantly less likely for a company like PayPal (Mega-cap example) to go bankrupt than it is for Happiness Biotech Group (Nano-cap example).

One of my favorite things to ask myself before doing any research on a stock is, “Can I picture a world where this company doesn’t exist?”.

Sure, there are absolutely cases to be made for making small bets on the little guy who might turn into the next Amazon. To earn a reward, risk is almost always a requirement. When it comes to safe, long term investing, I usually like to stick with the big guys (outside of index funds, that is).

Small vs. Large

As hinted at above, there is no doubt that risk is a requirement for rewards.

The risk vs. return battles are never ending, the debate is always interesting, but do we have some actual financial evidence to look over?

Who am I kidding… of course I do!

Longertermtrends.net provides an excellent breakdown of the Wilshire Indices in the below photos (see full interactive graph here).

In the short term, at least from 2011 to 20142, the volatile little guys performed incredibly well:

small cap stocks

 

We saw some mild volatility in 2015, causing the script to almost completely flip, and the following 5-6 years of craziness did quite a bit of damage to those little guys. The large/mega caps ultimately won out:

Large cap stocks

 

In Summary

I think there is room for all different kinds of market capitalization in a well diversified portfolio. The proportions just need to align with one’s risk tolerance.

At the end of the day, market capitalization is a nice and quick way of judging the size of a company. Every situation is different, every company is different, always do your research!


Thank you so much for taking the time to read this! I put a lot of work into these articles. If you ever have any questions, comments, or suggestions please do not hesitate to reach out to me!

My contact information can be found here!

– RCG

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