One of the biggest factors that affect investing is the size of the company. The way we measure the size of the company is what we call market capitalization. And what market capitalization is, is a number that you derive by multiplying the price of a company by the shares that the company has issued and are trading in the market.
In the market, there are large cap companies, medium cap companies, and small cap companies. As you may guess, companies like Apple, Facebook, and Google are huge, and they are actually mega caps, which is even larger than the large cap. There are medium companies and there are small companies. There are a few reasons that you care about the size of the company.
First of all, when we look at the market, what we consider market is a slice of the market. When benchmark creators measure the market, they look at the size of the company to divide the totalk stock market into sectors. The S&P 500 index, for example, has some of the largest stocks in the market and because of how big these companies are, the returns of these companies drive the entire market.
That’s the reason why you could be invested in the biggest companies, and you could get a pretty decent return and do pretty well when the markets are going up. There is, however, an aspect of the smaller companies that every investor should be very cognizant and knowledgeable about. Small cap companies are considered very risky, but when we look at the history of the markets over a very long time, they have produced a higher return for their investors than the large cap companies.
These companies are harder to identify, harder to track and harder to get excited about when companies like Apple and Facebook and Google seem to be crushing it year after year and again and again. Still, f you want to really be smart about your investing, you've got to look at three types of companies and make sure that you have investments in all three buckets with the large companies comprising, probably the bulk of your investments, and then supplemented by medium companies and small companies. This allocation can give you an extra edge over the long term - that is, if your time horizon, your goals and your risk tolerance allow you to invest in this way.
Large, small, and medium companies are the way we slice the market at a very high level. The size of the company will drive a lot of the returns that you will see. Once you understand that, then you can figure out which mutual funds or stocks you want to invest in to reach your goals.
If you’re new to investing and this sounds very confusing, please work with a financial professional to make sure that your portfolio is well-designed and well-structured for your long-term financial and life goals.