Companies or mutual fund are often categorized as small cap, mid cap and large cap. In these terms ‘cap’ is a short for capitalization. By this we can categorize the company’s size even though it can be categorized in different scales. Investors should understand these terms as they are present everywhere and very useful in measuring the company’s size and riskiness.

Determining Market Capitalization

Market Capitalization is nothing but a market worth of company’s outstanding shares. The formula for finding the Market Capitalization is: (Stock price x Total number of shares outstanding)

Importance of Market Cap

The very common misunderstanding about the stock price is that higher the stock price, the larger the company. Stock price, on the other hand, may not enlighten the company’s real worth.

The categorization of companies in different caps let the investors know which company has potential of growth and riskiness of a company. Traditionally, large caps have experienced slower growth and lower risk and the small caps have experienced higher growth potential, but with the higher risk.

Kinds of Capitalization

Following are the different types of Capitalization.

• Mega Cap: This group is comprises of companies having market cap of $200 billion or greater than that. Mega caps are largest publicly traded companies like Exxon (NYSE:XOM) typically the leaders of their industries comes in this category.
• Big/Large Cap: This group comprises of companies having market cap between $10 billion to $200 billion. Companies like Microsoft, Wal-Mart (NYSE:WMT) comes under this group. Comparatively large caps stocks are considered as stable and secure. Mega and Large Cap stocks are referred as ‘blue chips’
  
• Mid Cap: This group comprises of companies having market cap between $2 billion to $10 billion. Including the companies who are not the leaders but they are doing well in becoming one. These companies are generally considered as unstable as compared to Mega-Cap and Large-Cap companies.
• Small Cap: Usually new companies or somewhat young companies come in this group. The small caps have market capitalization between $300 million to $2 billion.
• Micro Cap: This group consists of ‘penny stocks’, companies having market cap between $50 million to $300 million comes under this group. Both the growing potential and the downside potential of these companies are parallel to each other that’s why they do not suggest the safest investment, and immense research should be made before entering into such situation.
• Nano Cap: Generally companies having market caps below $50 million comes under this group. These companies have low potential of growth and the risk is high. Usually these stocks do business on ‘pink sheets’ or ‘OTCBB’

But keep in mind that these ranges are not set in stone they keeps on fluctuating depending on how the entire market is performing.

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