Large cap vs Small cap stocks

What is market cap?

Market cap otherwise called market capitalization is a metric that helps you understand the size of a company, and is calculated by multiplying the outstanding shares of a company by the company’s stock price. Publicly traded companies may be categorized as either small cap, mid cap or large cap.

Large-cap stocks / companies:

✓ Are considered more mature companies with market caps of $10 billion or more. ✓ Are usually very stable, and they tend to dominate their respective industries. A few companies considered to be large caps include Amazon, Microsoft, Facebook and Alphabet. ✓ Usually have a proven track record of their performance and achievements over many years. ✓ Are generally less risky and tend to hold up better during a recession.

Small-cap stocks / companies:

✓ Are usually younger companies with market caps of less than $2 billion. ✓ Tend to be the more volatile with a higher probability of failure. ✓ Are considered riskier, however they often offer significant growth potential, as they have a lot more room to grow. ✓ Have less liquidity when it comes to trading. ✓ Are usually more difficult for potential investors to analyze or evaluate due to less available public information.

Should I invest in Large caps or Small caps?

Investors should use their risk tolerance, time horizon, and financial goals as a guide to help them determine whether to invest in large cap or small cap companies. It’s recommended that Investors diversify their portfolio across a mix of large and small cap stocks. For those who have a longer time horizon, or who can take on more risk, they may invest in small cap stocks as they seek to achieve more aggressive growth and higher potential returns. Less risky investors with a shorter time horizon, who are seeking more consistent returns, should consider investing in large-cap companies. Large-caps frequently offer dividends as an incentive for their investors, providing a steady source of income.

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