So what’s the difference with large cap vs small cap stocks?
Quite a bit actually!
In this article, we will help shed light on market capitalization, differences between large and small cap stocks, and things to consider when trading both types.
What is Market Cap?
Market cap is a measure of a company’s value that investors are placing on the company at a given point in time. This measure refers to the total dollar value of a company’s outstanding shares of stock.
Outstanding shares include all shares — those available to general investing public and restricted shares held by and available to specific groups.
To calculate market cap, simply multiply the share price of a stock by the total number of shares outstanding.
Market Capitalization = Number of Shares Outstanding x Price
For example, a company with 30 million outstanding shares selling at $10 per share would have a market cap of $300 million.
Based on their current market caps, stocks of publicly traded companies are classified into large cap, mid cap, and small cap. Some traders, breakdown the list further to include micro caps and mega caps at the extremes.
Let’s dig deeper into large caps and small caps.
What is a Large Cap?
Large cap stocks are shares of companies with market capitalizations of $10 billion or more.
These companies are dominant in their respective industries and typically have major influence over the economy.
Their businesses are more diversified and may include a wide range of services and products in multiple industries.
What is a Small Cap?
Small cap companies typically have a market value that ranges from approximately $300 million to $2 billion.
They are often new companies that are struggling financially or focused on a niche market.
Generally, small caps have a narrow focus, operating in few locations and offering a smaller number of services or products.
They tend to not be profitable either. They usually use any profits and reinvest them back into the company in order to help grow.
Examples of Large Caps
In the U.S., examples of large companies include JPMorgan Chase (NYSE: JPM), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), Coca-Cola (NYSE: KO), General Motors (NYSE: GM), and Disney (NYSE: DIS), – long-established titans with well-established positions in their industries.
Examples of Small Caps
Think of a company like Koppers Holdings (NYSE: KOP), which currently has 21 million shares outstanding and a share price of $33 per share. Therefore, its market cap is 696 million.
Other examples of small cap companies include Zynex Medical (NASDAQ: ZYXI), Regenxbio (NASDAQ: RGNX), and Ontrak (NASDAQ: OTRK). Small cap companies are often seen as more sensitive to the economic cycle than large caps.
What to consider when trading small caps
Most traders prefer to trade small cap stocks because of their high volatility.
Once you have identified a few contenders for small cap stocks to trade based on your criteria, it is time to begin digging and doing a little research.
News catalysts may cause the share price of small cap stocks to move more sharply than a stock offered by a large cap company.
Start looking around at what is causing the stock to move, and why.
Is there any important news that you can identify? For instance, did the company just announce a new hot product or a merger, or was there an earnings report just released.
These wild swings in price is what traders are looking to take advantage of.
But while you may get a larger return on your trade, you also expose yourself to more risk because of the volatility. Risk management is crucial when trading, especially with small caps.
One of Ross’s favorite strategies for trading small caps is the Gap and Go.
He basically looks for small cap stocks with low floats that are gapping up on some kind of news catalyst. He looks for continued momentum when the market opens to scalp moves higher.
You can learn more about his trading strategy by clicking the link below to our FREE trading course!
What to consider when trading large caps
Some day traders often avoid large cap stocks because of the higher share price. But these stocks offer excellent opportunities for traders to grow their account.
If you want to make intelligent and calculated decisions when trading large cap stocks, you have got to make use of technical analysis.
Utilizing technical analysis tools will help to see if there are any noticeable patterns in the price of the stock.
Look at stock chart patterns to help you decide if it is an ideal time to buy a large cap stock like whether its overbought or oversold.
Charts also help day traders to figure out appropriate entry and exit points. You can also use your charting techniques for all trades, whether it is a large cap, mid cap, or a small cap.
Pros of trading Small Caps
- Because of their relatively smaller size, small cap companies have significantly higher growth potential. For example, the Russell 2000, an index that tracks small-cap stocks, grew 18.4% in 2020, which is 2 percentage points better than the S&P 500
- These stocks offer vast opportunities for traders to leverage the inefficiencies in market pricing and make a good return on their investments
- They can be ideal for less conservative traders who can tolerate volatile stock price swings
Cons of trading Small Caps
- Small caps are generally considered to be more risky investments than large caps because of their unreliable and less established business models in their respective industries
- Small cap stocks may demonstrate lower liquidity than large cap stocks, which may make it difficult to sell the stocks at a favorable price or result in the potential unavailability of the stock at a good price to buy
Pros of trading Large Caps
- Large caps are less risky and less prone to extreme swings in their stock prices
- These stocks typically greater analyst coverage, which may result in higher demand for the stock
- Most large caps have the potential for a steady dividend stream for longer term holders
- They tend to have plenty of liquidity for traders to get in and out of positions easily
Cons of trading Large Caps
- Not enough volatility, particularly in large cap stocks that pay dividends
- Higher risk of a hedge fund or mutual fund with huge orders altering the trade out of nowhere
- Large cap stocks tend to offer less potential for high returns than their small cap counterparts
Now that you know how publicly traded companies are categorized based on their market cap, make sure to do your own homework before trading stocks to understand the risks and how they play into your own goals and strategies.
Don’t put all your money in one stock and make sure to manage your risk appropriately.
Analyze your investment horizon and risk profile before planning to day trade large and small cap stocks.
Credit: Warrior Trading