Should You Invest in Small or Large-Cap Stocks
What is a stock’s market capitalization?
The total dollar value of all outstanding shares of a stock is known as its market capitalization. Companies with a low market cap are known as small-cap stocks, and companies with a high market cap are known as large-cap stocks.
Small-cap stocks are generally more volatile since the share price is more affected when shares are bought and sold. When purchases and sales easily change a stock price, this means the stock has low liquidity.
What defines small-cap and large-cap stocks?
A company’s market cap determines whether it is a small or large-cap stock. A small-cap stock has a market cap between $300m to $2b. Furthermore, a large-cap stock has a market cap of $10b or greater. However, many companies have market caps between $2b to $10b in small-cap indexes such as the Russell 2000.
Should you Invest in small or large-cap stocks?
Investors must consider their risk tolerance and investment holding period when selecting stocks to invest in. The longer you hold a stock, the more you can potentially make. It is recommended to hold stock investments for a minimum of ten years to increase your chance of making a profit. To provide context, if you invested in an index fund in 1999, you would not make any profit until 2013.
Investors do not have to limit themselves to only investing in small-cap or large-cap stocks. A good combination of both can build a diversified portfolio. Investors with a higher risk tolerance can allocate more capital to small-caps, while risk-averse investors can allocate more to large-caps.
Investing in mutual funds
Many mutual funds focus specifically on small-cap or large-cap stocks. Funds are great because you can gain exposure to hundreds of stocks without doing any research. There are also passively managed mutual funds called index funds that are the most popular.
The most popular large-cap stock index is the S&P 500, which gives investors exposure to the top 500 large-cap stocks on the stock market. On the other hand, the most popular small-cap stock index is the Russell 2000. The easiest way to invest in the S&P 500 is to buy the stock ticker "SPY." You can invest in the Russell 2000 by purchasing the stock ticker "IWM." These are both exchange-traded funds (ETFs) similar to index funds.
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