Types of Stocks - Large-Cap, Mid-Cap, and Small-Cap Stocks

Stocks are sometimes categorized by their market capitalization, or market cap.

Market Capitalization = Stock Price x Number of Stocks Outstanding

While the divisions are indistinct, and will depend on inflation, a large-cap company is one with a market cap greater than $5 billion; a mid-cap company , $1 - $5 billion, and small-cap companies are valued at less than $1 billion. Many of these companies can be found by looking at the components of the various indexes, such as the Russell Indexes.

The large-cap stocks consists of the blue-chip, income, defensive, and cyclical stocks, since large companies have little potential for growth. Capital gains can be earned, however, by buying these stocks at the bottom of a business cycle and selling them as the economy reaches full speed. Large-cap stocks have the best price stability and the least risk.

Mid-cap stocks are composed of most of the categories listed here, since their market caps range from the top of the small-cap market to the bottom of the large-cap market. A particular kind of mid-cap stock are the baby blue-chip stocks, which are stocks of companies that, like the blue-chip companies, have consistent profit growth and stability, and low levels of debt, but are smaller in size than the large-cap blue-chips.

Small-cap stocks are small companies that have the greatest potential for growth—hence, most of these stocks are growth or speculative stocks, and most tech stocks are also in this category, since many tech companies specialize in a narrow niche of the market, or they were started to develop a new product or service, such as the many Internet companies that sprouted during the stock market bubble. In some cases, the small-cap stocks are distinguished from the even smaller micro-cap stocks., such as can be found in the Russell Microcap Index. Note that even the micro-cap stocks include only those stocks that are listed on major exchanges—they do not include OTC bulletin board securities or pink sheet stocks, which do not satisfy the requirements to be listed on a major exchange.

Small-cap stocks tend to do better than other stocks at the beginning of an economic expansion, unless their growth is constrained by the availability of credit, since they rely more on banking financing than larger companies that can sell bonds directly to the market.