In the securities business the term “cap”, short for market capitalization, refers to the total value of all of a publicly traded company’s outstanding stock on a given day.
For example, if Company A has issued a total of one hundred million shares and the closing price today is $10 per share, the market capitalization will be $1 billion. This value varies from day to day with the market price of the stock and the number of shares issued.
The Various Cap Levels
Capitalization is one of several measures used to evaluate the size and performance of a company. In common practice, companies are ranked by their total capitalization into broad categories with approximate dividing points:
- Small Cap – less than $2 billion
- Mid Cap – between $2 billion and $10 billion
- Large Cap – over $10 billion
These values refer only to a firm’s equity. They do not account for other factors such as debt, sales, earnings or dividends. Cap descriptions are further refined by the terms Mega Cap for values over $200 billion, Micro Cap between $50 million and $300 million and Nano Cap under $50 million.
Caps and Mutual Funds
Investors, particularly mutual fund buyers, may focus on one of these specific cap levels to determine what to buy to meet their objectives. Mutual funds often have descriptions such as “Large Cap Income”, “Mid Cap Growth” and the like. These funds then focus on companies inside the various cap levels.
Large Cap companies, often called “blue chips”, include the giants of the business world. They are main drivers of our economy and are more stable overall in terms of sales and capitalization. However, a Large Cap stock is not guaranteed to remain stable, as in the case of Enron. According to the Financial Times, the five largest cap companies as of March, 2014 were Apple, Exxon Mobil, Microsoft, Google and Berkshire Hathaway, each with a market cap of over $300 billion. Mid Cap companies may or may not be well known to the public and are more likely to be undervalued, making them worth researching. Recent examples include Brinker International, Choice Hotels, Foot Locker and Nustar Energy. At the other end, small startups and IPOs may be in the Small Cap range. These companies are riskier, often operating in growing niche sectors such as health care or technology. They have potential for fast growth, rapid decline or even complete failure.
The ‘cap” system should only be used as a starting point in making investment decisions. Larger caps tend to mean slower growth and lower risk but there have been many individual exceptions. Research into fundamentals such as earnings, P/E ratio, sector performance and other factors should also be part of any sound investment process.