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Market Capitalization
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Market capitalization, or "market cap" represents the total dollar value of a companies outstanding equity shares. It is calculated by multiplying the total number of oustanding shares by the stock price. Market cap is a common benchmark for many investment managers in determining which stocks they invest in. Companies are classified into different sectors, based on their market cap. Nano-cap, micro-cap, small-cap, mid-cap, large cap, and mega cap are the different categories that a company can be placed within. It can be generalized that the smaller the market cap, the higher the risk and the higher the growth as well. Large caps are generally well established companies with lower growth rates and lower risk at the same time.
In the table below, you can see the different market cap ranges for each category. It is important to note that each brokerage house can create their own thresholds, but these are the standard ones. Investors looking to get exposure into each of these segments can get involved with ETFs which track some fo the market cap index benchmarks such as the S&P 500 (large cap), S&P 400 (Midcap), S&P 600 (Small Caps).
| Category | Market Cap |
| Nano-Cap | < 50 Million |
| Micro-Cap | >50 Million <300 Million |
| Small-Cap | >300 Million <2 Billion |
| Mid-Cap | >2 Billion <10 Billion |
| Large-Cap | >10 Billion < 200 Billion |
| Mega-Cap | > 200 Billion |
Nano-cap stocks are very risky investments and will not trade on major stock exchanges. They will typically be traded on OTC or Pink sheets.
Micro-cap stocks are similar to nano-cap stocks and typically have common shares with a value below $5, classifying them as penny stocks. They are a bit more established but still very risky.
Small Cap stocks represents the first tier that many money managers and hedge funds can get involved in. This sector contains smaller, but established names with a moderate amount of risk. These names will not be household names but will not be a fly by night company either.
Mid Cap stocks are where you will see alot of money managers and particularily hedge funds getting involved. This sector represents solid companies with a good track record, but just not large enough to be considered a large cap. They have greater growth prospects and a tad bit more risk than a large cap but this is an area where some great up and coming companies can be found.
Large Cap stocks are where most investors and fund managers spend their time investing. This sector consists of well known, "top shelf" companies who have a very sound business plan, consistent profits, and high dividend payouts. This sector comes with lower risk, but with lower risk comes lower reward.
Mega Caps are your Microsofts' and Walmarts of the world. They are gigantic household names which reach the majority of the population. These are very low risk and provide steady profits and dividends. Their footprint is so large and they tend to hold up the strongest in the face of an economic slowdown.
