Large-cap stocks and small-cap stocks are two of the three primary categories of stocks as measured by size. The third category is mid-cap stocks. "Cap" is short for market capitalization, which is a way of measuring a company's size by multiplying its outstanding shares by its share price.
The majority of stocks available to the public are large-cap stocks. According to the Dow Jones Indices, approximately 70 percent of stocks are large-cap stocks, while only 10 percent are small-caps. Various financial services firms use their own numbers for defining small cap, mid cap and large cap. But as a general rule, large-cap stocks must have a market capitalization of at least $8 billion. Small-cap stocks are those with a market capitalization below $1 billion. Mid-cap stocks occupy the wide middle ground between the two. The best-known companies in the United States are large-cap stocks, including household names such as General Electric, Coca-Cola and Google.
Small-cap stocks and large-cap stocks typically operate at different philosophical stages. Small-cap stocks are typically younger and seek to achieve aggressive growth, ultimately building to mid-cap and then large-cap status. Because they have a lot of room to grow, they often offer greater potential gains in share price and a higher return for investors. Many large-cap stocks, meanwhile, are so big that it is more difficult to achieve massive growth. Smaller, steady gains tend to be a worthy goal for large caps.
Small-cap stocks represent much higher-risk investments than large-cap stocks. Future success is not certain for these companies. Management is often short on experience, and many of the companies still lack typically resources. In contrast, large-cap stocks typically have a proven track record over many years. They frequently have a broad mix of products, while small caps have fewer products and a smaller margin for error. In addition, some small-cap stocks trade over the counter instead of on exchanges and do not face the same level of regulation and oversight as large-cap stocks, which the Securities and Exchange Commission regulates.
Large-cap stocks frequently offer dividends as an incentive for investors, providing a steady source of income and a financial motive to purchase shares. Dividends are payments to shareholders from a company's profits and are distributed at regular intervals. Small-cap stocks do not offer dividends to their investors nearly as often as large-cap stocks. Instead of issuing dividends with their profits, small-cap stocks are more likely to reinvest those profits into the company, helping to fuel growth.