Market Capitalization and Diversification | Stocks Portfolio Management

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Market Capitalization and Diversification

Thursday, 14 August 2008 11:14

Market capitalization is not just a bit of trivia or market verbiage that you learn as an investor; it makes a real difference in your decision making as you construct your portfolio. Market capitalization will often indicate the level of inherent risk and profit potential in a stock and the mix of stocks with different market capitalization in your portfolio should reflect your own risk tolerance and trading style.

Market capitalization or "market cap" is easy to calculate as the total outstanding shares multiplied by the stock price. Market capitalization is the total value the market places on a company and its assets. There are four major size categories of market cap that traders will commonly refer to. Each of these are listed below.

Large Cap: Over $5 billion market cap

Mid Cap: Between $1 billion - $5 billion in market cap

Small Cap: Between $500 million - $1 billion in market cap

Micro Cap: Less than $500 million market cap

You can calculate a company's market cap from information available from any quote service. For example, Microsoft Corporation (MSFT) has 9.13 billion shares outstanding and a current stock price of $28 which results in a market cap of $255.64 billion. A market cap like that clearly places MSFT in the large cap category.

Investors will often ascribe certain characteristics to stocks in one market cap category or another and depending on what your investment objectives are you may find yourself gravitating to one or two of the categories over the others for investment opportunities. For the most part, these differences are related to risk and growth potentials. In the next two section of this lesson we will look at these two differences across market cap categories so you can start using that information to search for investment opportunities that fit your trading style.

Do you prefer one type of market cap over another? If so why? Join us in the forums.

Need some help learning about diversification? Click here to find out more in our stocks essentials course.