There are hundreds of different equities to invest in on various exchanges. Some are priced a few cents per share, others thousands of dollars. All fall into one of three categories:
- Small caps (aka penny stocks)
- Medium caps
- Large caps
The values for determining small, medium and large cap shares can be vague and differ between countries but as an example, large caps in the US typically have a market capitalization of $10 billion-plus.
Market cap—or market capitalization—refers to the total value of a company's shares: The price of a share multiplied by the total number of outstanding shares gives you market cap.
For example:
A company with 10 million shares selling at $50 a share would have a market cap of $500 million.
Market capitalization is often used to make investment decisions as it gives investors an idea of the size of one company versus another company. But is bigger always better?
- Investing in large-cap companies is thought to provide long-term rewards and less risk, as the companies are well established and stable.
- Mid-cap companies have great growth potential but are often seen as constrained by track record and resources.
- Small-cap companies are often considered a high-risk investment choice due to factors like their limited financial resources. However, many companies fall in this category, and so there are many people who don’t want to lose out on the opportunities they offer.
Often shares are over or under-valued based on a variety of factors – some logical, some emotional. Like so much in investing, there are no right or wrong answers. Invest in penny stocks, medium or large caps or a mixture of the three. But make sure you know your risk appetite, have a plan and do your research.
