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Market Capitalization

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A company’s market capitalization (commonly shortened to “cap”) is found by multiplying the current share price by the number of shares outstanding.

Market capitalization is useful in comparing companies of similar size.

It is also used as a tool by mutual funds when determining investment style.

So what are the different market capitalization segments?

Market Capitalization Segments

You will always see three market capitalization segments: large-cap, mid-cap, small-cap.

Less common are three additional categories: mega-cap, micro-cap, nano-cap.

All these terms have some flexibility in their usage and in the ranges for each segment. I will provide the common categorizations, but be aware that you may see slightly different terminology and different ranges at times.

Segment Ranges

Over $200 billion are the mega-cap companies. Microsoft (current market capitalization of $208 billion), Apple ($220 billion), and Exxon ($300 billion) are examples of these extremely large companies.

Between $10 billion and $200 billion are large-cap. If mega-cap is not used by the rater, they will be included in the large-cap segment. Cisco Systems ($121 billion), AT&T ($158 billion), and Amazon ($55 billion) would fall into this grouping.

Between $1 billion and $10 billion are mid-cap. Polo Ralph Lauren ($8 billion), H&R Block ($4 billion), and Office Depot ($1 billion) are examples.

Between $300 million and $1 billion are small-cap. K-Swiss ($394 million), Ruby Tuesday ($608 million), and Quicksilver ($471 million) are small-cap stocks.

Between $50 million and $300 million are micro-cap. Arctic Cat ($142 million), THQ ($238 million), and Winnebago ($244 million) are in this category.

Below $50 million are nano-cap. Athersys ($50 million), Aastrom Biosciences ($40 million), and China Logistics ($3 million) are non-cap stocks.

If micro or nano are not utilized, these segments will be part of the small-cap segment.

Ranges May Differ

As I stated above, some investment professionals, mutual fund companies, or ratings agencies may use different terms and/or ranges for the market segments.

For example, Investopedia includes all companies up to $2 billion in size as part of the small-cap segment.

Morningstar utilizes percentages to segment their stocks. Equities are divided into 7 geographic regions. Within each region, the top 70% of stocks are classified as large-cap. The next 20% are mid-cap and the last 10% are deemed small-cap.

Note that with this Morningstar system, internal and external comparisons may be difficult.

Perhaps a stock that is construed as a large-cap in Latin America is only a mid-cap in the Greater Europe region. This makes internal comparisons of global companies within the Morningstar system harder than by using a fixed dollar calculation.

Second, it makes external comparisons between rating organizations difficult. Morningstar has Canada as a unique region, so the bottom 10% of Canadian companies in size are considered small-cap. But unless I know the exact cut-off point, it is hard to compare to someone that uses a threshold of $1 or $2 billion for Canadian firms.

So when assessing stocks as large, mid, or small-cap, do not blindly accept the classification by the organization that segments the equity. Do your own analysis to ensure that, in your own mind, you know what type of company it is.

Market Capitalization Investing Caveats

First, market capitalization may fluctuate over time based on how a company’s share price performs, as well as the number of outstanding shares it has. Small-cap companies aspire to increase their share price so as to move up into mid, or even large-cap, segments.

Also, some companies slip over time to lower segments. Being large is not protection from declines in value.

For example, consider the Canadian telecommunications company, Nortel. In September 2000, its market capitalization was CAD 398 billion. In less than two years, Nortel was worth under CAD 5 billion. If you had wanted to invest only in large or mega-cap equities, you would have found yourself owning (almost) a small-cap stock very quickly.

Second, the larger the capitalization, the more shares are outstanding, which normally translates into increased liquidity for investors.

If investing in nano or micro-cap companies, you may find it difficult to buy or sell shares on a timely basis and/or at your target price. This may also be the case for small-cap stocks.

Reduced liquidity can increase the volatility (risk) of an investment. That is why smaller capitalized companies are generally considered riskier than larger companies.

Third, the smaller the companies, the less publicly available information exists. I am not necessarily referring to corporate filings, such as annual reports and statutory documents. More in respect of investing information.

Many small firms are not actively followed by stock analysts, so getting research or recommendations is difficult. This is compounded by the fact that industry peers are also small firms with relatively little investment information.

Fourth, small-cap firms may be closely held by insiders or other persons or groups connected to the company. While one cannot legally trade on inside information, insiders do have better access to company data and tend to do better than non-insiders.

So when considering investments in small-cap or smaller stocks, be careful.

We will see how market capitalization segments are used extensively in mutual funds.