Small-Cap vs. Large Cap Stocks: What’s the difference?

Small-Cap vs. Large Cap Stocks: What's the difference?

Small Cap vs. Large Cap Stocks:

Historically, market capitalisation, defined as the value of all outstanding shares of a corporation. It has an inverse or opposite relationship to both risk and return. On average, large-scale corporations are those with market capitalizations of US$ 10 billion and more. They tend to grow more slowly than mid-cap companies. Mid-cap companies have a capitalization of between $2 billion and $10 billion. While small-cap corporations have a capitalization of between $300 million and $2 billion. These definitions of large caps and small caps vary slightly between brokerage firms, and the dividing lines have shifted over time. The different definitions are relatively superficial and are only relevant to companies on the borderline.


  • Publicly traded companies are often segmented by their market capitalisation, i.e. the total value of their market shares,
  • Large cap corporations, or those with larger market capitalizations of $10 billion or more, tend to grow slower than small caps with values ranging from $300 million to $ 2 billion.
  • Large caps tend to be more mature companies and therefore less volatile on rough markets. Investors move towards quality and become more risk-averse.
  • Small caps and midcaps are more affordable than large caps, but the volatility of these markets has led to large caps in 2019.

The Small-Cap Stock

Small-cap shares have fewer publicly traded shares than mid-cap or large cap companies. As mentioned earlier, these companies have between $300 million and $2 billion of the total dollar value of all outstanding shares — those held by investors, institutional investors, and corporate insiders.

Smaller enterprises will float smaller share offerings. Thus, these stocks may be traded thinly and may take longer to finalize their transactions. However, the small-cap market is one place where the individual investor has an advantage over the institutional investors. Since they buy large stock blocks, institutional investors do not participate as often in small-cap offerings. If they did, they would find themselves in control of the portions of these smaller enterprises.

Lack of liquidity remains a struggle for small-cap stocks, especially for investors who are proud to build their diversification portfolios. There are two effects to this difference:

  1. Small-cap investors may struggle to unload their shares. If there is less liquidity in the marketplace, an investor may find that it takes longer to purchase or sell a particular holding with little daily trading volume.
  2. Small-cap fund managers close their funds to new investors at lower management asset (AUM) thresholds.

The Large Cap Stocks

Large cap stocks, or large caps, are shares traded by corporations with a market capitalization of $10 billion or more. Large cap stocks tend to be less volatile in rough markets as investors move toward quality and stability and become more risk-averse. These companies comprise more than 90% of the American equity market. Including names such as the mobile communications giant Apple (AAPL), the multinational conglomerate Berkshire Hathaway (BRK.A), and the oil and gas colossus Exxon Mobil (XOM). Many indices and benchmarks follow large-scale companies such as the Dow Jones Industrial Average ( DJIA) and the Standard and Poor’s 500 (S&P 500).

Since large cap shares represent the majority of the U.S. equity market, they are often seen as core portfolio investments. Characteristics often associated with large cap stocks are as follows:

  1. Transparent: Large cap companies are usually transparent, making it easy for investors to find and analyze public information about them.
  2. Dividend payers: large cap, stable, established companies are often the companies investors choose to receive dividend income distributions. Their mature market establishment has made it possible for them to establish and commit to high dividend payout ratios.
  3. Stable and impactful: large cap stocks are typically blue-chip companies in peak business cycle phases, generating established and stable revenues and earnings. Because of their size, they tend to move with the market economy. They are market leaders, too. They often produce innovative solutions with global market operations, and market news about these companies generally has an impact on the wider market as a whole.

Main Difference

There is a significant advantage in terms of liquidity and analyst coverage for large caps. Large cap companies have a solid track record, and an array of corporate finance, independent analysis, and market data is available for review by investors. In addition, large caps tend to operate with more market efficiency — price exchange representing the underlying company — also trade at higher volumes than their smaller cousins.

Small-cap stocks tend to be more volatile and riskier. Small-cap enterprises generally have less access to capital and, overall, not as many financial resources. This makes it difficult for smaller companies to obtain the necessary funding to bridge cash flow gaps, fund new market growth efforts, or undertake large capital expenditures. This issue can become more acute for small-cap companies during low economic cycles.

Despite the additional risk of small-cap stocks, there are good arguments for investing in them. One advantage is that it is easier for small companies to achieve proportionately high growth rates. Sales of $500,000 can be doubled much more easily than sales of $5 million. Often, since small, intimate managers also run smaller businesses, they can adapt more easily to changing market conditions in the same way that it is easier for a small boat to change course than for a big ocean liner.

Similarly, large cap stocks are not necessarily desirable. As mature businesses, they can provide fewer prospects for growth and may not be as nimble to evolving economic patterns. Indeed, a number of major corporations have experienced uncertainty and lost their favor. Just because it’s a big limit, that doesn’t mean it’s always a big investment. You still have to do your analysis, which means looking at other, smaller companies that can provide you with a good basis for your overall investment portfolio.

An example of history

Volatility hit small caps at the end of 2018, but this is not a new phenomenon. Small-cap stocks were doing well in the first three quarters of 2018, beginning in September of that year with the Russell 2000 Index up 13.4 percent compared to 8.5 percent for the S&P 500. Between 1980 and 2015, small caps averaged 11.24 percent of annual growth in the face of growing interest rates. Comfortably beating midcaps at 8.59 percent and large caps at 8.00 percent, in the first weeks of 2019.