Stock mutual funds are grouped into three different ‘market capitalization’ size categories; Large, Mid, and Small. Market capitalization is calculated by multiplying a company’s outstanding shares by the company’s stock price per share.
For example, a company with a stock price of $20 and 100 million shares outstanding (a market cap of $2 billion) is actually smaller in size than a company with a stock price of $5 and 500 million shares outstanding (a market cap of $2.5 billion).
What is a large-cap fund?
A large cap fund would hold companies with a market value of $10 billion or more. Large cap companies are generally well known brand names who are established. Holding large cap funds is considered more conservative than mid cap and small cap funds. Examples of large cap stocks would be Apple, Alphabet (formerly Google), Microsoft, Exxon Mobile, and Amazon.
What is a mid-cap fund?
A mid cap fund would hold companies with a market value between $2 billion and $10 billion. Mid cap companies are still known like large cap, only they aren’t there just yet. These medium sized companies are growth companies on the rise, with the hopes of becoming large cap if their growth warrants the promotion. Or, if the stocks under perform, the may go back down to small cap. Examples of mid cap stocks would be ConAgra Foods, Molson Coors Brewing Co., Dollar Tree, Dr Pepper Snapple Group, and Clorox.
What is a small-cap fund?
A small cap fund would hold companies with a market value between $300 million to $2 billion. Small cap companies are usually young and hungry, and therefor aggressive and risky. These are more high risk, high reward. Small cap companies are generally much more vulnerable, whereas large cap companies would be your “steady Eddies”. On the other hand, small-cap stocks may offer significant growth potential to long-term investors who can tolerate volatility. Examples of small cap stocks would be Valspar, Domino’s Pizza, Vail Resorts, JetBlue Airways, and Starwood Property.
Which market cap funds are best?
The obvious answer is all of them. You should never be in just one of these classes without some exposure to the others. Most investors have a great deal of exposure to large cap stocks via an S&P 500 index fund. However, it is in your best interest to also have some “growth” exposure via mid-cap funds and small-cap funds.
I am currently reading The Million Dollar Portfolio from The Motley Fool founders, David and Tom Gardner. There was a quote in there about small-cap stocks that I loved…”buy the seed, not the plant.”