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21 July 2022

An Introduction to Small and Large-Caps

The terms ‘small-cap’ and ‘large-cap’ are well known in the investments sphere and, at first, their definitions and how they impact investors and their portfolios may seem clear cut. However, the difference between small and large-cap companies extends far beyond their actual market capitalisation.

To begin, a company’s market capitalisation is calculated by multiplying the total number of shares by the share price. For example, a company with 10m shares valued at £10 each would have a market capitalisation of £100m. This figure represents how valuable the investing community views a company to be and can, of course, be impacted by factors including popularity, performance and hype. Loosely speaking, small cap stocks are companies said to have market capitalisations of less than £350m while mid-caps have capitalisations of less than £2.5bn. Although the share price (or number of shares available) tends to be lower than that of mid or large-cap companies, small caps have historically outperformed larger firms.

Large-caps, meanwhile, often operate in more mature, but still growing industries such as banking and big tech. Many large-cap companies which feature on the Cboe 100 Index are household names and include the likes of AstraZeneca, BT Group and Coca-Cola, while some of the largest in the world include Apple, Alphabet and Microsoft. One of the key differences between small and large-caps is their volatility. Generally speaking, large-caps often experience lower stock value fluctuation, in part due to their stronger financial resources. Their position means that they may recover from these fluctuations quicker than smaller companies, some of which may not have the resources to survive tougher market conditions. Larger companies may also be more likely to award dividends to their shareholders than smaller companies, which may not be in as strong a position.
Despite their potential to perform strongly, small cap stocks have an entirely different risk profile. As small caps may still be in their growth period or are simply smaller firms, they may operate with less financial resource than their larger counterparts. Similarly, they may also have fewer assets to borrow against and, as many tend to still be in their development stage, this means they can have greater volatility. As a result, small caps sometimes offer greater risk, but also the potential for higher returns.

What we in the UK and those in the US would describe as small or large-cap companies does differ dramatically. On the UK Cboe 100, the largest market capitalisation is £173.97bn at the time of writing. Yet, on the S&P500 in the US, it’s top company, Apple, has a market cap of US$2.38tn. There is a perception that the difference between small and large-cap companies is clear, yet the gulf between the two, albeit extreme, examples of Apple and Shell demonstrates that although both are defined large-cap companies, some operate in a league of their own.

This article was taken from the May 2022 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
An Introduction to Small and Large-Caps

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