Just what are large cap and small cap stocks and what does it matter? The market capitalization is the determining factor of whether or not a company is considered a large company or a small company from an investing point of view. Market capitalization is nothing more than multiplying the price of the shares on the open market by the amount of shares outstanding. The larges company from a market capitalization view is Exxon with a market capitalization of 464 Billion. The smallest company in the S&P 500 is PMC-Sierra with a market cap of 1.6 billion. The difference is generally over 5 billion market cap for large cap, 1 to 5 billion for mid-cap, 250 million to 1 billion for small cap and less than 250 million for microcap stocks.

When determining a stock investment strategy, should you concentrate in one particular type of company? The answer is probably not. Correct asset allocation would state that you should have a mix of both. However, lets look at what each would provide.

Large cap stocks are the big boys. They are the companies that have been around and have grown to enormous sizes. They supposedly have the ability to dominate their markets and determine the succeeding product lines and which direction their industries are going to go. This may not be fully true. Sometimes, the small companies are small enough to be innovative and can move on a dime to change direction and emphasis. However, the large cap stocks do have a lot going for them. Institutions invest a lot in the large caps, so they can drive the stock price up if they feel the opportunity is there.

Some of the more recent arguments for small caps are that they are innovative and can show the big boys something. Some studies show that from 1926 to 1998, small cap stocks have grown by 12.18% compared to the large cap growth of 11.22%. Advocates of small cap point to this difference as the reason to invest in small caps.

In looking at this difference further, we find that from 1926 to 1964, large and small caps return was almost identical. From 1964 to 1968, small caps returned more than double the large caps but that difference was erased by 1973. During the period of 1973 to 1983, small cap stocks grew at a tremendous rate. This period of time is what has been the reason that small caps are shown to historically outpace large stocks. However, if you exclude that one decade, large caps have a 11.1 percent return compared to small caps return of 10.4 percent.

So based on that result, large cap stocks are the way to go. The argument is fun to work on and many studies have been done for each side. However, as I pointed out above, a good mix would have a combination of each. This would allow for the investor to enjoy the benefits of both worlds.

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