Firstly, "cap" is short for market capitalization, which is the total market value of a company's outstanding shares of stock. It's computed by multiplying a company's shares outstanding by the current market price of one share. Shares outstanding refer to the total number of shares of a corporation that have been issued and are held by shareholders, including institutional investors, insiders, and members of the public. These shares represent ownership in the company and can earn dividends or appreciate in value, providing a return on investment for the shareholders.
Large-cap companies are typically those with a market capitalization of over $10 billion. These are established, stable entities and are often household names. Think of companies like Apple, Google, or Microsoft. Investing in large-cap stocks is generally considered less risky because these companies have a proven track record of stability and performance. However, although stable, large-cap stocks may not offer the highest potential for rapid growth.
Mid-cap companies, on the other hand, are those with a market capitalization typically between $2 billion and $10 billion. These companies are often in the process of expanding. They carry greater risk than large-cap companies because they are not as established, but they also offer greater growth potential. Mid-cap stocks can be thought of as a middle ground between the stability of large-cap stocks and the potential of small-cap stocks. They have proven their business model to some extent and may be on their way to becoming large-cap, but they also have enough room to grow and innovate.
Finally, small-cap companies generally have a market capitalization of under $2 billion. These are typically young or niche companies and can offer the highest potential return on investment because they have much more room to grow compared to established companies. However, small-cap stocks also pose the highest risk among these three categories. They often face more business uncertainties, their stocks can be more volatile, and they can even go out of business.