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.
Large-cap stocks are issued by corporations with a market capitalization of $10 billion or more, and small-cap stocks are issued by corporations with a market capitalization between $250 million and $2 billion.
Size of the Stocks
The majority of stocks available to the public are large-cap stocks; in fact, the best-known companies in the United States are large-cap stocks, including household names such as General Electric, Coca-Cola and Google. According to the Dow Jones Indices, which rates the stocks of the 30 largest companies in the U.S., approximately 70 percent of stocks are large-cap stocks.
But with approximately 5,000 different U.S. index companies, expect to see this percentage rated differently among them. For example, the Wilshire 5000 Total Market Index, which rates all the stocks in the U.S. market, ranks large-cap stocks at a whopping 91 percent.
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 $10 billion. Small-cap stocks are those with a market capitalization between $250 million and $2 billion. Mid-cap stocks occupy the wide middle ground between the two – between $2 billion and $10 billion.
Differences in Growth
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.
Risk of Investment
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.
Use of Dividends
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.