What the Average Investor Needs to Know About Small, Mid, and Large Caps
Understanding Asset Allocation: For the Average Investor
When building an investment portfolio, an investor should contemplate asset allocation across the entire portfolio when developing their strategy.
Asset allocation—the selecting of how much money goes into stocks, bonds, cash or other investments—is just as important as choosing the underlying investments. With long-term investing, the composition of assets within a portfolio will have a significant effect on overall risk and returns.
For example, a strategy such as the Tactical Income Strategy by Hilton Capital Management puts emphasis on how assets are placed within a portfolio. Hilton Capital Management is an investment firm handling over 1.6 billion in balanced and equity strategies. Tactical Income was created to give fixed income investors the opportunity to increase their potential returns in a tax efficient manner while not dramatically increasing their level of risk.
In this particular strategy, the goal is to preserve capital while delivering an income component to a portfolio's return.
But, within the equity market, asset allocation can further be explored. The public equity market can be divided into small cap, medium cap, and large cap stocks.
Small Cap Stocks
A small cap stock’s market capitalization—the share price multiplied by the number of shares outstanding—is typically between $300 million and $2 billion.
In general, small cap companies tend to be small, growing companies. Often, these companies are in growth industries such as technology. Of the three market capitalization categories, small cap stocks are regarded as the most risky.
The competition from existing, larger companies can make business fierce, and small companies may not have the resources needed to weather difficult economic periods.
However, small cap stocks may offer strong growth potential and earnings to long-term investors who are willing to hold these stocks through times of price volatility.
Medium Cap Stocks
These stocks have a market cap of $2 billion to $10 billion.
Though these stocks may not get the same attention as the fast-moving small caps, medium cap stocks have performed well over long periods. Medium cap companies are established in their areas of business, and may be expected to experience further, significant growth.
These medium-sized companies may be concentrating on building market share or strengthening their competitiveness in their business. These stocks usually offer less risk than small cap stocks, but may not return the same performance because of the smaller growth factor.
Large Cap Stock
These are associated with massive companies that control dominant market share in established industries. The market cap of large cap stocks is in the range of $10 billion to $200 billion.
They are well known in the market and usually provide popular goods and services. Large cap companies may also consistently pay dividends to stock shareholders.
Relative to small cap stocks and mid cap stocks, investing in large cap stocks is considered more conservative. Large cap stocks generally come with less growth potential, but their long-term, steady growth and sheer size can lower the volatility of their stock prices.
Each of these three categories of stocks can play a diversifying role in a personal finance portfolio. With steady capital appreciation and possible dividend payments, an investment in large cap stocks can be an important, fundamental pillar in the stable growth of a portfolio.
To add potential returns to a portfolio, small cap and mid cap allocations can be added or increased, but will also add risk to the overall portfolio.
To optimize asset allocation takes thorough analysis. Therefore, it can be a significant benefit to employ an investment firm well versed in personal finance investing.