One way to categorise companies is according to their market capitalisation – the total market value of a company’s outstanding shares. To calculate a company’s market capitalisation (or ‘market cap’), multiply the number of outstanding shares by the current share price.
Large cap companies
Although there is no set rule, large cap companies generally have a minimum market capitalisation of $10 billion or more. They tend to be in established industries and are considered major players in their field.
Large cap companies are more likely to show consistent returns over time rather than short-term gains (likewise, their prices are likely to be less volatile than less-established companies). Large cap companies also tend to make regular dividend payments (although this isn’t guaranteed).
In Australia, the S&P/ASX50 (XFL) index represents the top 50 companies, according to float-adjusted market capitalisation.
Mid cap stocks
Mid-cap stocks generally have a market cap ranging from $2 billion to $10 billion. They tend to be established companies in the process of expanding in industries that are expected to experience rapid growth. Because they don’t tend to be as established as large cap companies, they generally involve a higher level of risk.
Mid cap companies are often considered the ‘blue chip’ companies of the future and so therefore can be attractive to investors because of their growth potential.
The S&P/ASX Mid-Cap 50 Index tracks the second half of the companies on the S&P/ASX 100 (or the companies that number 51-100).
What about small caps?
Small cap companies are generally classified as having a market cap between $300 million and $2 billion and are often categorised as growth stocks. A growth stock is considered to have the potential for above average growth but also a higher degree of risk.
The S&P/ASX Small Ordinaries index tracks the smaller players of the S&P/ASX 300 Index (that is, all the stocks tracked on the index outside of the first 100).
Things you should know
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