Everyone knows about small capitalization (cap) stocks and large cap stocks, but a lot of people have forgotten about mid cap stocks. They are like the red headed stepchild of investing. Like Rodney Dangerfield, mid cap stocks get no respect. It is important to know all of the different capitalization definitions in order to ensure that you are adequately diversified.
What Is Market Capitalization?
First things first…what is the definition of market capitalization? Market capitalization, which is also almost always referred to simply as “market cap”, is a measurement of the size of a company. You measure market cap by multiplying the number of outstanding shares by the current stock price. The number of outstanding shares is the amount of common shares of a company’s stock that have been issued by the company during their initial public offering (IPO) and subsequent stock offerings from the company’s treasury. Outstanding shares of stock have voting rights and represent ownership in the company by people or institution that owns the shares. But, outstanding shares are not the same as treasury shares, which is common stock held by the corporation, and are not counted in market capitalization figures. For example, Dr. Pepper Snapple Group (Stock Symbol = DPS) has 245.7 million shares outstanding that can be bought or sold through the open market. Dr. Pepper’s share price is currently $37.55. So, Dr. Pepper’s market capitalization is $9.2 billion, which would make it a mid cap stock, barely.
An interesting side note… the total market capitalization of all companies around the world listed on 54 different stock exchanges reached $51.225 trillion USD at the end of January, 2010. This was according to a recent article about market capitalization featured in Reuters.
What Is A Mid Cap Stock?
Want to hear a real kick in the pants? Everyone throughout the investing industry uses different definitions for the capitalizations. They may all calculate them the same, but there is no official definition of or agreement about the exact cutoffs between the different categories. Where does small caps end and mid caps start? Companies that are traded on the stock exchanges have historically been divided into three categories: large cap, mid cap, and small cap. Recently, many investors have added micro cap and nano cap after the explosion in popularity of small cap companies. Most investors use rules of thumb to determine category from market capitalization. One of the most popular ways to classify stocks is…
Large cap: $10 billion–$200+ billion
Mid cap: $1 billion–$10 billion
Small cap: $300 million–$1 billion
Micro cap: $50 million-$300 million
Nano cap: Below $50 million
What To Watch Out For When Investing
These stock market capitalizations are not set in stone and change over time. For example, in 1950, a company with $1 billion in capitalization was quite large. These figures are often adjusted over time for inflation, population change, and overall macro-economic factors. These factors can also be different for foreign countries. Because there are no set guidelines as to who calls what company a mid cap or any type capitalization, you have to read the fine print of your mutual fund’s prospectus to find out what they classify as their capitalization ranges. If it is very important to you that your investing company sticks to a certain strategy, you need to know exactly how they define their categories.
In order to be well diversified, investors must understand how stocks are broken down into categories based on market capitalization. Ensuring that you have investment in each of the main categories such as large, med, and small caps will enable you to ride out the worst times of the stock market and reap the benefits of the best times. Don’t forget the mid caps.