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Equities in the stock markets are usually grouped based on their market capitalisation. Market cap is essentially the total number of available shares in a company, multiplied by the value of each share. Market cap is a useful metric for determining the value of a listed company.
Not all companies on the stock market have the same value. That's why the stock markets have to give each listed equity a classification. Below, we’ll explore the differences between large, mid and small-cap stocks and provide examples of well-known equities that fit the mould of each category.
Large-cap stocks are rightly viewed as the biggest listed companies on the planet. These conglomerates tend to have global exposure and have been in existence for many years, even decades. These large-cap stocks have highly recognisable brands and are often the target of investors looking to buy individual equities as well as those investing in equity funds or indices like the S&P 500.
The S&P 500 – an index of the top 500 listed companies on American stock exchanges by market cap – is a good starting point for finding the biggest large-cap stocks. As a guide, the smallest market cap in the S&P is Embecta Corporation, which accounts for just 0.000005% of the index's entire market cap. If you're wondering what the stock with the biggest market cap is, you won't be surprised to find that it's Apple which carries a weighting of around 7.18% of the index's total market cap.
When it comes to the habits of a large-cap stock, these equities are more likely to generate consistent yet modest growth in investment terms. That’s because large-cap stocks have already experienced significant levels of growth to reach their current market cap status.
It’s a lot easier to generate a 25% return from a low base. Although large-cap stocks are less likely to yield big percentage returns, their stability means that their price is less likely to fall. Furthermore, bigger listed companies with substantial revenues are also more likely to dish out shareholder dividends that can make up for the modest share price returns.
Large-cap stocks are best-suited to investors with deep pockets already. The nature of large-cap stocks makes it hard to find a ‘bargain’ large-cap stock as everyone knows about them – and we mean everyone!
Apple (AAPL)
Apple Inc. has been one of the most influential tech firms in the last century. Founded in 1976 by the late Steve Jobs, Ronald Wayne and Steve Wozniak, this pioneering firm has driven standards in the personal computer (PC) market. It was also instrumental in the proliferation of the smartphone era, with its iPhone range becoming a global phenomenon.
Microsoft (MSFT)
Microsoft is another conglomerate in the tech industry. It is joined by Apple in the so-called “Big Five” US corporations working in IT. The remaining three are Meta, Alphabet and Amazon. The masterminds behind the Windows PC operating system and the hardware of Xbox video game consoles, Microsoft is still one of the biggest software developers on the planet too.
Tesla (TSLA)
Tesla Inc. has rapidly become one of the world’s most valuable companies. It has a relatively brief history, having been founded in July 2003, but it continues to play a key role in the product and technological development of electric vehicles, as well as battery energy storage and other related products and services.
AstraZeneca (AZN)
As the number-one ranked equity in the FTSE 100 and one of the world’s largest pharmaceutical companies, AstraZeneca is cemented within the high-cap stock category. AstraZeneca has been highly influential in the development of rapid vaccines for the Covid-19 pandemic. It’s also been instrumental in a broad spectrum of products to tackle other severe cardiovascular, neurological and respiratory diseases.
Note: This list showcases examples of large-cap stocks on the leading stock exchanges. It should not be viewed as recommendations for large-cap stocks to trade.
If you’re wondering what defines an equity as a mid-cap stock rather than a large-cap or small-cap stock, you’re in the right place. Mid-cap stocks are those with more modest market capitalisations than large-cap equities.
They are usually in the range of $2-$10 billion. However, they also tend to have more headroom for growth in the context of the ceiling of their respective share prices. In addition, mid-cap corporations can improve their annual earnings at faster rates than those of well-established large-cap conglomerates. This gives shareholders in mid-cap equities the opportunity to receive periodic dividends as well as benefits from increased share prices.
Mid-cap stocks also tend to be more sensitive to volatility in the market, which gives patient traders the ability to go long on a mid-cap stock at discounted prices on occasion. This is a particularly attractive option for those looking to add a mid-cap stock to their investment portfolio with the potential to grow into a large-cap equity in the long term.
Another beneficial reason to invest in a mid-cap stock is the potential for the company to be involved in mergers and acquisitions (M&Q) with bigger firms. Mid-cap stocks that post impressive revenue growth may be on the radar of more established conglomerates in the same industry, with the potential for them to acquire the mid-cap stock and bring all their expertise in-house.
In this scenario, existing shareholders of the mid-cap stock are often given a preferential price for their shares to accept the buyout.
Avis Budget Group (0HK4)
US-based car hire firm Avis Budget Group is the parent company behind the likes of Avis and Budget Car Rental, as well as Zipcar and Budget Truck Rental. With a workforce of around 18,500 as of 2021, Avis Budget Group is established as one of the leading vehicle hire firms, with a market cap of approximately $7.78 billion.
Mattel (0JZH)
Mattel is a multinational toy manufacturer based in the heart of California. The firm dates back to the mid-1940s and is now considered to be the world’s second biggest toy maker after The Lego Group. Mattel’s current market cap is said to be in the region of $8.73 billion.
The Wendy’s Co. (WEN)
The Wendy’s Co. is the parent company of the world-renowned Wendy’s fast food chain. It’s a brand that’s synonymous with hearty American diner fare, since opening in November 1969. It’s since expanded to offering drive-thru and delivery services on top of its eat-in service. Wendy’s Co. has a current market cap of approximately $4.5 billion.
Greggs (GRG)
The iconic British bakery chain has become one of the nation’s leading snack brands on the high-street. Specialising in baked savoury and sweet goods, Greggs started out in the north-east of England but has since grown into a nationwide phenomenon, with a market cap of just over $2.45 billion.
Note: This list showcases examples of mid-cap stocks on the leading stock exchanges. It should not be viewed as recommendations for mid-cap stocks to trade.
There are several characteristics of a small-cap stock that differentiate it substantially from large and even mid-cap stocks. First and foremost small-cap stocks are more likely to post higher returns in share price, as the value of its stocks have not fully matured like a large-cap stock.
Equally, small-cap stocks are just as likely to post significant losses as higher returns, such is the volatility of small-cap equities that are most susceptible to industry and macroeconomic headwinds.
Small-cap stocks are also lesser-known corporations. That doesn’t mean they aren’t worthwhile investments. It just means investors need to conduct more detailed research on these equities to determine their growth prospects.
On a stock-by-stock basis, small-cap equities tend to carry greater risk than mid and large-cap stocks. However, when combined with a diversified portfolio of large and mid-cap equities, it’s possible to find small-cap corporations that have the potential to yield bigger, faster returns.
For a listed company to be considered a small-cap stock, its market cap should be valued in the region of $300 million to $2 billion.
ACM Research (ACMR)
ACM Research produces cleaning equipment for semiconductor wafers. It is proving particularly popular with small cap stock investors as it's a low-cost entry into the semiconductor sector, with the firm operating largely in China.
CarParts.com (PRTS)
This site used to be known as U.S. Auto Parts. CarParts.com is now a major auto parts portal, with second-hand parts surging during the Covid-19 pandemic. It is also scaling up its distribution, with four-fifths of the country now reachable in just two business days.
Ramaco Resources Inc. (METC)
Ramaca Resources is one of the fastest growing small cap stocks in the US. This coal mining firm in West Virginia, Virginia, and Pennsylvania has seen net income soar by almost 1,000%.
On The Beach Group (OTB)
Founded in 2003, On The Beach Group are specialist online travel agents. Launched to coincide with the dot-com boom and the surge in online enquiries for holidays, On The Beach now has 500 staff dedicated to vacations at home and abroad.
Note: This list showcases examples of small-cap stocks on the leading stock exchanges. It should not be viewed as recommendations for small-cap stocks to trade.
What are the dynamics that define a small-cap stock from a large-cap stock? Below, we explore the nuances of small, mid and large-cap stocks to help you understand the pros and cons of each asset type before incorporating them into your investment portfolio.
Growth potential
There is a significant difference in the growth potential of large-cap and small-cap stocks. Typically, large-cap stocks have already achieved a significant amount in their respective markets and have a more stable existence as an established player.
Meanwhile, small-cap stocks are the ‘new kids on the block’ and have a much higher ceiling for future growth. However, with that higher ceiling comes greater risk and the chance their potential is unfulfilled. Those seeking more moderate growth and less turbulence than a small-cap stock should consider a mid-cap equity.
Investment risk
The risks for investors differ greatly between small, mid and large-cap equities. Large-cap stocks tend to have greater demand and liquidity, with the ability to withstand volatility.
Mid-cap stocks often have a higher growth potential than large-cap firms, with the ability to yield bigger returns over the short-to-medium term. However, they are more susceptible to volatility.
Small-cap equities carry the greatest risk exposure for investors as these companies are still in their relative infancy compared with bigger firms. Some are just as likely to fail as continuing to expand.
Liquidity
Liquidity is rarely an issue for large and mid-cap stocks. This means there is usually plenty of money on both sides of the order book, looking to buy and sell their shares. Shares in large and mid-cap stocks can usually be bought and sold without affecting the overall share price.
Small-cap stocks typically have the lowest liquidity out of the three stock types as they tend to attract fewer investors.
Market volatility
Large-cap equities are less susceptible to market volatility. Even in less certain economic conditions, the share price on these established corporations is relatively stable. That’s why they are often viewed as low-risk investment options.
Mid-cap and small-cap stocks are more exposed to market volatility as their liquidity is often much lower and their respective share prices can fluctuate that much faster.
Commercial stature
It goes without saying that large-cap stocks are typically some of the biggest and most established listed companies in an industry. Large-cap firms may have thousands of employees and a global customer base.
At the other end of the spectrum, small-cap stocks are generally viewed as ‘up-and-coming’ brands or companies. These small-cap equities may be attempting to disrupt or innovate a sector to get a foothold in the marketplace. As for mid-cap stocks, their commercial reputation is somewhere in between the other two.
So, now that we know how equities are ranked based on their market performance, it’s also useful to understand how often these classifications are reviewed.
It’s true that the classification of equities as small, mid and large-cap stocks – and their reclassification to move from small to mid-cap, for example – does happen, but with little regularity. As many more listed companies have entered the financial markets, the stock rankings have had to evolve over time.
What used to be considered a large-cap stock 30 years ago may now only be considered a small-cap equity. The thresholds for defining small, mid and large-cap stocks are by no means definitive, but as you gain experience in the stock market you should be able to differentiate between them.
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