If you’re a stock investor you’ve probably asked yourself the question before. While there are many different kinds of stocks, that can be broken down into different categories based on a set of seemingly endless criteria, one of the best ways to set them apart is by market capitalization.
Market capitalization is basically what we mean when we multiply the amount of outstanding shares of a company times the price per share. It’s basically the value that the market is placing on the company at any moment in time.
The two biggest companies Apple and Amazon are inching forward towards reaching $1,000,000,000,000 in market capitalization. Meaning if you multiplied the stock price of either company times the amount of shares of that company, you’d end up with a number just shy of $1Trillion.
This has clearly never happened before but is expected as the market experiences inflation and growth.
So which one is best, small-cap stocks or large-cap stocks? Well there are certainly good individual companies in each category. For example even though apple is a large company, it is a solid investment for appreciation even for an already large company.
What happens is that depending on the economic circumstances and if they’re better for large or small companies each of these asset classes will perform accordingly. Thus, you’ll get periods when large-caps outperform small-caps and vice versa. However, generally in our history, small-cap stocks as a whole have outpaced their large-cap counterparts. The reason? Size.
When you think of a tree, whether an oak, maple or redwood, you can think of the different stages in its life. As a little seed and sapling, trees usually experience either rapid growth when they’re little, or they die off.
The reason there’s so many little trees at the bottom of a forest floor is that most of them don’t survive, but the ones that do usually experience rapid growth. The same is true with companies.
When a company is small it’s just trying to pay the bills, grow revenue and establish credibility that will equate to market share. But often these smaller companies can’t outlast the constant bombardment of competition so they die off.
If you look at the small-capitalization indexes they have tended the out-perform the large-cap indexes like the S&P 500 (an index of the 500 largest companies in the U.S.).
If you’re young and can ride the volatility, go with small cap stocks. If you want to mitigate short-term loss and volatility, large-caps are generally better.
Whichever you choose, good luck.
Disclaimer: The information regarding personal finance found in this blog is not a substitute for professional guidance. By following the guidance in this blog you are doing so at your own risk. This blog is simply the option of one person for informational and educational purposes. Please refer to your personal financial advisor in regards to guidance over your specific situation.