Large Cap Vs Small Cap Stocks

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.

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 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.

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.

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.

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:

• Large capitalization companies are less volatile and, hence, less risky to invest in. Hence, investments in these companies are appropriate for risk-averse. Whereas small capitalization companies are highly volatile; therefore, they are riskier to invest in, and therefore these are more suitable for risk-seeking investors.
• Large-capital capitalization companies have a market capitalization of more than USD 10 billion. Small-capitalization companies have a market capitalization of less than USD 2 billion.
• Small Capitalization stocks can 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 as large-cap stocks.
• Large capitalization companies are big organizations and have strong balance sheets. They are usually strong in 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 sell shares as per the price of the investors' wishes. Small companies are less liquid and grow; hence they wish to invest in their own company. In this, they face difficulty buying shares in bulk and 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, and Reliance. Small-capitalization companies in the Indian market are Kriti, Vikas Ecotech, Sintex, 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 at the bottom of the market capitalization spectrum.

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.

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.

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 goodwill of its key promoters, and the financial strength to stand on in difficult times.

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 –

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