Sizing Things Up

Sizing Things Up

Audio Version: Let Me Hear It!

Be you a caffeine addict or not, you are likely familiar with the terms tall, grande, venti and possibly even the newer trenta. But, even those of you that routinely order a grande quad shot mocha latte probably don’t know how much you’re actually getting in each cup size. In a similar way, whether you are an active investor or a passive one, you likely have exposure to small, medium and large-size companies, but may not know exactly what that means. To better understand a common set of investment terms, fill up your cup of joe and read on.

Simply put, market capitalization is the total value of a company’s outstanding shares on the market. It is found by multiplying the current stock price by the total number of shares outstanding. If a company has 20 million shares outstanding, trading at $100 per share, then the company’s “market cap” is $2 billion. There is some debate about the actual cutoff between cap sizes, but generally speaking, companies sized between $2 billion-$10 billion are considered mid-cap. If you can remember that, you can remember the rest. Anything smaller will be categorized as small and anything larger will be considered a large-cap stock.

It’s not enough to just understand the concept of market-capitalization. As an investor, you must also understand the different growth and risk characteristics of each company size. To assist, we’ve put together the chart below to help educate you about each market cap category.

Like trenta, “mega cap” is a newer market definition reserved for the largest companies in the world and is defined by a capitalization that exceeds $100 billion. Examples include Apple, IBM and Exxon Mobil.

For those of you that are just too curious, let us save you a Google search. The actual drink sizes are 12, 16, 24 and 31 ounces.