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Introduction to Market Capitalization

Retirement plans usually offer a variety of stock funds, each with its own investment strategy and objective. Market capitalization, also known as market cap, is one way of differentiating stock funds and refers to the total market value of a company's outstanding shares. Your retirement plan may offer small, mid, and large-cap stock funds, and it is important to understand how they differ and their potential benefits and risks.

A company's market capitalization is one factor that a fund's investment manager(s) may consider when deciding which stocks to include in a fund. Capitalization is calculated by multiplying a company's outstanding shares of stock by its current stock price. For example, a company with 100 million outstanding shares of stock at a current market value of $25 per share has a capitalization of $2.5 billion.

Category
Market Capitalization
Common Benchmark Index
Large cap
Companies with capitalizations of $10 billion or more
S&P 500 Index

Consists of 500 stocks chosen for market size, liquidity, and industry group representation

Mid cap
Companies with capitalizations between $2 and $10 billion
Russell MidCap® Index

Measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 31% of the total market capitalization of the Russell 1000 Index
Small cap

Companies with capitalizations of $2 billion or less

Russell 2000® Index

Measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index

* It is not possible to invest directly in an index.

Large-cap funds

Large-cap stocks (also known as "blue chips") are generally issued by mature, well-known companies in established industries. These companies often have a history of more steady growth. Large-cap funds are often considered more conservative than investments in small- or mid-cap funds. However, with lower risk, large-cap funds may also potentially provide lower return than their small- or mid-cap counterparts.

Mid-cap funds

Mid-cap stocks are issued by medium sized companies that may have the resources and distribution of large-cap companies with much of the quickness and agility of small-cap companies. This combination may help mid-caps take advantage of new opportunities while having more financial resources to weather economic storms. Mid-caps typically fall between large and small caps on the risk/return spectrum—offering more growth potential than large-cap stocks and possibly less volatility than small caps.

Small-cap funds

Small-cap stocks offer the potential for rapid growth, but come with a higher degree of risk. These stocks are typically issued by young companies that generally serve unique markets or emerging industries, such as those in the technology sector. Small companies tend to be more nimble and may react quicker to market and technological conditions. However, the relatively limited resources of small companies can potentially make them more susceptible to a business or economic downturn or volatility of the markets. 

Striking a balance

Market cap is just one factor to consider when choosing funds for your portfolio. You may also want to consider the fund’s objectives for growth vs. value (see the Comparing Growth vs. Value article to learn more). Having a mix of investment types may help you to weather the markets natural fluctuations, which may favor different investment styles at different times. 

Consider taking the Risk Tolerance Quiz to learn more about your investor style.