Why market cap matters

While every company may be unique, a company's total market value—its market capitalization, or market cap, for short—is widely used to create a context for judging company financial performance and business outlook.

Larger companies tend to have more broadly diversified business structures than smaller firms. This may give them more stable business performance from year to year, with relatively less variable earnings and revenue streams. As a result, large companies may have less volatile share prices than smaller firms in many circumstances. Large companies generally have also tended to be the least sensitive to economic headwinds.

Smaller companies, on the other hand, tend to have a tighter business focus. They may have the potential for more rapid revenue and profit growth, but this potential is often more variable. As a result, small-company shares may be, on average, more volatile and more sensitive to macroeconomic shifts than the shares of larger companies.

Putting numbers on market capitalization categories

Many market index providers, mutual fund portfolio managers, and investment advisors have proprietary guidelines for categorizing companies by market capitalization and, if necessary, recategorizing them. Standard & Poor's, for example, considers stock market value, financial performance, business sector, and historical factors in selecting the constituents for its large-, medium-, and small-company indexes. It also reevaluates all of its selection factors when it considers whether to recategorize a company due to market cap growth, contraction, or restructuring. S&P indexes, in turn, may be used as reference points in many portfolio management decisions.

This table illustrates the relative ranges of the large-cap, mid-cap, and small-cap market strata using the Standard & Poor's index view of the market.

S&P 500 S&P MidCap 400 S&P SmallCap 600
Median constituent market cap $30,392 million $5,332 million $1,354 million
Range of constituent market caps $652 million to $2,684,668 million $1,388 million to $14,995 million $183 million to $5,877 million
Source: S&P Dow Jones Indices LLC. Index market cap data were current as of April 28, 2023, and retrieved from http://us.spindices.com on May 16, 2023.
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Considering risk and reward potential in detail

Generally, market capitalization corresponds to where a company may be in its business development. So, a stock's market cap may have a direct bearing on its risk/reward potential for investors looking to build a diversified portfolio of investments.

Large-cap stocks are generally issued by mature, well-known companies with long track records of performance. Large-cap stocks known as "blue chips" often have a reputation for producing quality goods and services, and a history of consistent dividend payments and steady growth. Large-cap companies are often dominant players within established industries, and their brand names may be familiar to a national consumer audience. Of course, even large-cap companies have the potential to create significant losses for investors, as shown by the experiences of Enron, WorldCom, General Motors, and others. But on average, investments in large-cap stocks may be considered more conservative than investments in small-cap or mid-cap stocks, potentially posing less overall volatility in exchange for less aggressive growth potential.

Mid-cap stocks are typically issued by established companies in industries experiencing or expected to experience rapid growth. These medium-sized companies may be in the process of increasing market share and improving overall competitiveness. This stage of growth is likely to determine whether a company eventually lives up to its full potential. Mid-cap stocks generally fall between large caps and small caps on the risk/return spectrum. Mid caps may offer more growth potential than large caps, and possibly less risk than small caps.

Small-cap stocks tend to be, on average, least developed publicly traded companies, although there are exceptions. Small-cap companies are also more likely to be focused on niche markets and emerging industries, such as those in the technology sector. But whatever any company’s actual age or market focus, small caps as a group are considered the most aggressive and risky investments of the 3 categories. The relatively limited resources of small companies can potentially make them more susceptible to a business or economic downturn. They may also be vulnerable to the intense competition and uncertainties characteristic of untried, burgeoning markets. On the other hand, small-cap stocks may offer significant growth potential to long-term investors who can tolerate volatile stock price swings in the short term.

Keep in mind that there are notable exceptions to these generalizations. Some immature companies have achieved large-cap status due to intense short-term investor interest, without having built a diversified and stable business base. Such companies may be counted statistically in the large-cap universe. But they actually tend to have share-price volatility and earnings profiles more typical of small companies than larger ones. This may have been especially apparent during the technology bubble, but it can also be seen in the current market.

There are also small companies that have pursued niche business strategies or faced unusual market conditions, factors that affected their size and could continue to do so. These companies include some venerable names in manufacturing, marketing, and finance. Companies in this group tend to produce share-price and earnings profiles more typical of large-cap firms.

Market capitalization performance ranking year by year

In recent years, large-cap indexes have outperformed small-cap indexes, although historically, each has taken turns leading the market. This chart ranks the market-cap categories in order of performance, from first place to third.

S&P 500 S&P MidCap 400 S&P SmallCap 600
2013 3 2 1
2014 1 2 3
2015 1 3 2
2016 3 2 1
2017 1 2 3
2018 1 3 2
2019 1 2 3
2020 1 2 3
2021 1 3 2
2022 3 1 2
Source: Standard & Poor's. Based on annual returns from 2013 to 2022. Large-cap stocks are represented by the S&P 500; mid-cap stocks by the S&P MidCap 400 Index; and small-cap stocks by the S&P SmallCap 600 Index. These indexes are unmanaged and do not take into account the fees, expenses, and taxes associated with investing. Individuals cannot invest directly in any index. Past performance cannot guarantee future results.

Investment implications of market cap

A portfolio built with only stocks that fall into a single market-cap category could have different reward and risk patterns than a more broadly diversified portfolio might have. While diversification by itself does not assure profit or eliminate risk, it is possible that a more diversified portfolio may be more likely to have gains in one area that could help offset losses in another.

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© 2013 by DST Systems, Inc. Reprinted with permission from DST Systems, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.