Sizing up the stock market: How to understand large-, mid-, and small-cap stocks

The stocks that make up the U.S. market are divided into three categories — large, mid (medium), and small — based on the market capitalization, or value, of companies.


The stocks that make up the U.S. stock market are divided into three main categories — large, mid (medium), and small — based on the market capitalization of companies. Market cap, as it's known, refers to a company's value as calculated by multiplying its shares by its current share price.

Here's what you need to know about each category:

What are large-cap stocks?

When people talk about the stock market, they're often using that as shorthand to refer to a major stock index like the S&P 500 or the Dow Jones Industrial Average — both of which are made up of large-cap stocks, including the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google's parent company Alphabet).

Large-cap stocks are the largest publicly traded companies. You'll know many of these companies by name: Microsoft, Apple, Caterpillar, and Nike, for example. They're well-established firms with a proven track record in their industries and typically do business both in the U.S. and abroad.

The primary benchmark index for large-cap stocks in the U.S. is the S&P 500. The 500 companies in this index have market caps that currently range from $4 billion to $1 trillion.

What are mid-cap stocks?

Mid-cap companies are, naturally, smaller than their large-cap counterparts and may not have the same foothold in their industries quite yet, but many are gaining ground and have growth potential. You're likely to find names you recognize in this mix — Yelp, Mattel, Domino's Pizza, and Valvoline, for example — along with many that you haven't heard of yet.

One of the most-cited benchmarks for this category is the S&P MidCap 400 index. The 400 companies in this index have market caps ranging from almost $1 billion to less than $20 billion.

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What are small-cap stocks?

Many of these companies might eventually become mid- or large-cap companies but they may not be household names quite yet, and they tend to be more U.S.-focused in their businesses. While you could still recognize some names — Shutterstock, Lands' End, Cracker Barrel, and — many other companies in this cohort may be regional or very specialized.

The primary benchmark for small caps is the Russell 2000 index, made up of approximately 2,000 companies. These companies currently have market caps ranging from about $150 million to $5 billion.

There are stocks smaller than small caps — micro-cap stocks, as they're called — and these are the smallest publicly traded companies in the stock market.

How performance varies by size

You can easily invest based on market cap by buying index funds that track the major indexes. But performance can vary widely from large to small caps.

Large-cap companies are the most established and have multiple branches in their businesses. They're considered less risky for investing than smaller ones because small-cap companies typically operate a more specialized line of business, and could experience more dramatic swings in their performance and then their stock prices.

At the same time, larger, multinational corporations can be more affected by what's happening outside the U.S. — variations in global currency exchange rates, for example — that won't affect domestically focused companies.

Some market watchers look at the performance of small-cap stocks in relation to that of large caps to gauge U.S. economic growth. If small caps are outperforming large caps over a prolonged period, that suggests the pros believe U.S. growth will accelerate.

While all three groups of stocks generally move in the same direction, the extent can vary at any given time. So experts recommend you keep a mix of all three in your portfolio, a practice known as diversification. This way you can protect against losses in one area while still reaping the benefits of growth in another.

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