Large Cap Vs Small Cap Stocks

Updated on April 11, 2024

What Is Large Cap Vs Small Cap?

Large Cap stocks are usually the company’s stocks whose market capitalization would be worth more than $5 Billion, trustworthy, and well-reputed. Strong companies are well known to the public, whereas Small Cap is quite contrary to large-cap stocks, whose market value would be worth $300 million to $2 Billion.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Large Cap Vs Small Cap Stocks (wallstreetmojo.com)

The stock price of the company’s share does not decide whether the company is large or small-cap. However, market capitalization has a huge implication on the decision of investors, shareholders, and analysts. Their investment strategies and perception regarding risk and return is a result of the influence of market capitalization.   

Large Cap Vs Small Cap Explained

Large cap vs small cap is a comparison that is widely used in the financial market for the purpose of identification of stocks as per their market capitalization and decision making for investment. Investors, analysts and other stakeholders frequently compare stocks as per this criteria, so as to take informed decisions.

In this concept of large cap vs small cap performance, the calculation is done by multiplying the total number of outstanding shares of the company with the share price. This gives us an idea about whether the stock belongs to a large cap, mid cap or small cap company.

Large cap companies are mostly big businesses which are operating in the industry for many years and experiencing a steady growth. They have a great track record regarding profitability in the market and often perceived as businesses offering the best quality of products and services. They are the ones who have a huge customer base and the ability to absorb financial and economic downturns and keep performing to their best level consistently.

Small cap companies are mostly newly set up, small in size from the point of view of business operation and with less customer base. They are in the process of framing strategies and plans to grow as rapidly as possible and in the process, take higher risks compared to their resources. The stock prices of such companies experience frequent and large swings with changes in economic and market conditions. Even though these staock may give higher returns, they come with a lot of risk.

The large cap stock are perceived to be a conservative form of investment which can provide a stable dividend. Due to less price fluctuations, the returns may be less, but on the other hand risk is also controlled. In case of small cap, unlike the former, the return may be high but it comes with more risk. Investors prefer them due to their higher growth opportunity.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Example

Let us understand the concept of large cap vs small cap performance with the help of an example.

For example, if company A’s stock price is USD 50 and company B’s stock price is USD 20, it does not mean company A is a large-cap.

If company A has 100 million shares, the total market capitalization of company A is USD 5 billion; on the other hand, company B has 500 million shares, so the market cap of company B is USD 12 billion. So, both the values, that is market price as well as the number of outstanding shares are to be considered during calculation. Small-capitalization companies lie at the bottom of the market capitalization spectrum.

Infographics

The infographics given below show the differences in small cap vs large cap stocks in a concise and systematic format. It helps the reader to interpret and remember the points easily. Let’s see the top differences between large-cap vs. small-cap stocks.

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Large Cap Vs Small Cap Stocks (wallstreetmojo.com)

Large Cap Stock Explained in Video

 

Key Differences

The key difference section given below highlights the important point of differences between the two topics with a lot of clarity and details. Let us study them and understand the two concepts clearly. The followings are the key differences:

Which Is Better?

In order to identify which investment will be better for an investor, it is necessary to analyse the company fundamentals of small cap vs large cap stocks thoroughly and also assess the investor’s risk-taking capacity, financial goals, investment horizon and conditions of the financial market.

The company fundamentals like financial statements, the current and future projects and plans fro investmemt, the past financial history and market perception about the business is very important. It is also necessary to evaluate its debt and crefit worthiness so as to understand whether it has potential for profitability and sustainability in the current market conditions.

However, even though a through research helps, the best idea is to diversify the portfolio and include both large and small cap stock. This will help in reducing the risk as well as earn decent returns consistently.

Comparative Table

The comparative table below shows the differences in a tabular format points them out on the basis of their meaning, the level of risk involved during investment, what investors look for while investing in them, the liquidity level or how easily they can be converted to cash, dividend paying capacity of both, the strength of their balance sheets and availability of data.

BasisLarge CapSmall Cap
MeaningThis company has a market capitalization of more than USD 10 billion.This company has a market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more of less than USD 2 billion.
DefinitionIt lies on top of the market capitalization spectrum.It lies at the bottom of the market capitalization spectrum.
RiskLess risk in terms of the company’s failure. Hence the risk of investment in these companies is less.These companies are more volatile. Hence they are riskier for investing in shares than large-capitalization companies.
SuitabilityUsually, investing in shares of large-capitalization companies is suitable for investors looking for a safe investment for the long term with less risk.Investors looking for a higher return in short intervals with higher risk look forward to investing in these companies.
LiquidityThese stocks are easier to buy shares in bulk or sell shares as per the price of the investors’ wishes.These companies are less liquid, i.e., they face difficulty buying sharesBuying SharesKnowing how to buy shares is crucial for a person who wants exposure to the equity market. Equity markets are volatile, and timing is very important. Shares trade in exchanges, but you just can’t go and buy a share from the exchange. There are several steps involved in purchasing a share.read more in bulk and selling them at the price of the investor’s choice.
DividendThese companies are capable of generating a good amount of dividends.These companies face the problem of generating a good dividend compared to large-capitalization companies.
Example of CompaniesSamsung, LG Display, Sony, Reliance, Wipro, Infosys.JOLED, Universal Display Corporation, Decawave.
StrengthThese companies are usually strong in financial strength and focus on high-growth segments.


These companies’ financial strength is not that strong; hence, they cannot invest in highly growing segments.
DataInformation regarding these companies is readily available. These companies publish newsletters, annual review documents as well as media houses.Information on small capitalization companies may be available but not as detailed as the large-capitalization companies.

The investor must conduct thorough research of the company he is looking to invest in before they look to invest in it. The following is a key point that an investor should consider before investing in any company, either small or large capitalization.

The most important point to consider is the short and long term plans of the company, its revenue model, the profitability of the company, whether the company has invested in anything apart from its business, the goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more of its key promoters, and the financial strength to stand on in difficult times.

Recommended Articles

This article is a guide to what is Large Cap Vs Small Cap Stocks. We explain which is better, with example, infographics, video and key differences. You may also have a look at the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *