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August 31, 2007, Newsletter Issue #81: Small Cap, Mid Cap, Large Cap
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Tip of the Week
A diverse portfolio will include stocks from small cap, mid cap and large cap industries. "Cap" is short for "market capitalization".
Market capitalization is a measurement of the size of a company. It is calculated by multiplying the stock price by the number of outstanding shares. Smaller cap companies are usually riskier investments, but they also have the highest potential for growth. In the past few years, small caps have outperformed large caps, but many analysts report that the trend is changing. Make sure your portfolio isn't too heavily weighted either way in order to benefit (and protect yourself) from market trends.
Cap definitions aren't set in stone, but there are general guidelines for what makes something large or small. Small cap companies are less than $1 billion. Mid cap companies are between $1 billion and $5 billion. Anything higher than $5 billion is a large cap.
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