Large Cap vs Small Cap Stocks

Difference Between Large Cap and Small Cap

Large Cap stocks are usually the stocks of the company whose market capitalization would be worthy of more than $5 Billion which are trustworthy, well reputed and strong companies and also well known to public, whereas Small Cap, is quite in contrary to large-cap stocked whose market civilization would be worth from $300 million to $2 Billion.

The stock price of the company’s share does not decide whether the company is large or small-cap. For example, if a company A stock price is USD 50 and company B stock price is USD 20, so it does not mean company A is a large-cap.

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Source: Large Cap vs Small Cap Stocks (wallstreetmojo.com)

If company A has 100 million shares, so 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. Small-capitalization companies lie on the bottom of the market capitalization spectrum.

Large Cap vs. Small Cap Stocks Infographics

Let’s see the top differences between large-cap vs. small-cap stocks.

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Source: Large Cap vs Small Cap Stocks (wallstreetmojo.com)

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Source: Large Cap vs Small Cap Stocks (wallstreetmojo.com)

Key Differences

The followings are the key differences:

  • Large capitalization companies are less volatile and hence are less risky to invest. Hence, investments in these companies are appropriate for risk-averse. Whereas, small capitalization companies are highly volatile; therefore, they are riskier to invest, and therefore these are more suitable to risk-seeking investors.
  • Large capitalization companies are the companies that have a market capitalization of more than USD 10 billion. Small-capitalization companies are companies that have a market capitalization of less than USD 2 billion.
  • Small Capitalization stocks have the ability to give a higher return, but when there is a market downfall, these stocks fall higher than the Large capitalization. On the other hand, Large capitalization companies stocks provide mediocre returns in the bull markets but are not hit as hard when compared to large-cap stocks.
  • Large capitalization companies are big organizations and have strong balance sheetsStrong Balance SheetsA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more. They are usually strong in terms of financial strength and focus on high growth segments. On the other hand, Small-capitalization companies’ financial strength is not that strong. Hence they are unable to invest in highly growing segments.
  • Large capitalization companies stocks have enough cash on hand and are stable. Hence, it is easier to buy shares in bulk or selling shares as per the price of the investors’ wishes. Small companies are less liquid and are also growing; hence they wish to invest in their own company. In this, they face difficulty in buying shares in bulk and also selling them at the price of the investor’s choice.
  • Examples of Large capitalization companies in the Indian market are Infosys, TCS, Tech Mahindra, Wipro, Reliance. Small-capitalization companies in the Indian market are Kriti industries, Vikas Ecotech, Sintex industries, etc.
  • Information 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.
  • Large capitalization companies lie on top of the market capitalization spectrum. Small-capitalization companies lie on the bottom of the market capitalization spectrum.

Large Cap vs. Small Cap Stock Comparative Table

BasisLarge CapSmall Cap
MeaningThis company has a market capitalization of more than USD 10 billion.This company has a market capitalization of less than USD 2 billion.
DefinitionIt lies on top of the market capitalization spectrum.It lies on the bottom of the market capitalization spectrum.
RiskLess risk in terms of the failure of the company, hence the risk of investment in these companies is less.These companies are more volatile. Hence they are riskier for investment in shares of than large-capitalization companies.
SuitabilityUsually, investing in shares of large-capitalization companies is suitable for investors who are 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 in buying shares in bulk or selling shares as per the price of the investors’ wishes.These companies are less liquid, i.e., they face difficulty in buying shares in bulk and also selling them at the price of the investor’s choice.
DividendThese companies are capable of generating a good amount of dividends.These companies face a problem to generate a good amount of dividend when 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 terms of financial strength and focus on high growth segments.These companies’ financial strength is not that strong; hence they are unable to 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.

Conclusion

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 pointer that an investor should look at 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, 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.

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