The outstanding shares of a company are multiplied by its stock price for one share to calculate market capitalization. The stock price of a company alone does not reveal a lot about its size or total value. For instance, one with a $60 stock price is not worth beyond another with a stock price of $25. Read on to know how companies are classified according to their market capitalization.
Categorization Based On Market Capitalization
Much like their size, it is possible to categorize companies by market cap as well. Publicly traded organizations tend to be classified into three market capitalization categories: small cap, mid cap and large cap. Although not every company aligns with the same capitalization cutoffs per category, the categories tend to be expressed as follows.
Large Capitalization Stocks
Usually, ‘big cap’ companies are defined as those that have market capitalizations of at least $10 billion. Mega caps fall under the category of ‘large cap’ companies, and these are usually defined as the ones having caps of no less than $200 billion. These are often stable companies that dominate the industry they belong to. An example is Wal-Mart, which is the largest retailer in the world. It is one of the largest companies by market cap as well.
Both mega-cap and large-cap stocks often hold up during the recession in a better way, but these often underperform the small-cap ones if the economy comes out of a recession. Mega capitalization and large-cap stocks are often less volatile compared to the small- and mid-cap ones, so these are regarded as less-risky stocks.
Mid Capitalization Stock
Mid cap companies are usually considered to be the ones that have market capitalization, ranging from $2 billion to $10 billion. Often, mid capitalization stocks are not as risky as small capitalization stocks, but riskier compared to the large-cap ones.
Small Capitalization Stocks
Usually, the term ‘small caps’ is used to categories companies having a rather small market capitalization of up to $2 billion. Several small cap companies are young and have much potential for growth. However, they have a greater risk of business failure than the ones with both mid-cap and large-cap stocks. For this reason, small capitalization stocks are often more volatile than others, hence riskier compared to mid-cap and large-cap stocks. Traditionally, small capitalization stocks have underperformed the big-cap ones in recession times, and these have performed better than the latter during better economic climates.