There are many ways to slice and dice your investment portfolio. You might look at the mix of asset classes (stocks, bonds, cash equivalents); investment styles (growth, value, blend); market sectors (energy, technology, health care, etc.); or market capitalization (small-cap, mid-cap, large-cap). Having a healthy balance of investments — no matter how you slice it — can help manage risk through the ups and downs of the market.
Market capitalization is a key component in choosing a diverse mix of stocks for your portfolio. Stocks with different market caps often respond differently under the same economic and market conditions, so you may be able to manage risk by selecting stocks with different market caps.
Market cap is one measure of a company’s total value. It is calculated by multiplying the number of outstanding shares by the current market price of one share. For example: A company with 10 million shares outstanding currently trading at $40 a share has a market cap of $400 million. A company with 100 million shares outstanding trading at $40 has a market cap of $4 billion.
Large-cap, mid-cap and small-cap are the most commonly used terms for the levels of market capitalization. Definitions vary, but a typical range may look like this:
Large-cap: $10 billion or more.
Mid-cap: $2 billion to $10 billion.
Small-cap: $300 million to $2 billion.
Large-caps are generally large, well-established companies that are leaders in the market and perhaps even household names. Their product and service lines tend to be broad and diverse. They are less likely to have significant swings in price compared to small-caps, and they are more likely to pay dividends. These companies may have more resources to maintain stability during a bad economy, but they may not have as much growth potential as small- and mid-caps.
Mid-caps may be large or midsize companies that operate within a narrower scope than large caps. They may have growth rates that are more consistent than small-caps, but with more ups and downs than large-caps.
Small-caps are generally smaller companies that are more focused on a specific product or service. They may have higher growth potential and higher risk than mid- or large-cap stocks. These companies may also be more sensitive to changes in economic conditions.
One market cap may perform better than others over different periods of time. You may want to consider a mix of small-, mid- and large-cap investments in your portfolio.* A Seaside Client Advisor can help you explore the options and how they may fit into your investment strategy. Schedule an appointment with your Seaside client advisor today.
* Diversification does not guarantee a profit or protect against loss in a declining market. Past performance is no guarantee of future results.
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