Understanding the language of 'caps'

Here's what you need to know... By Michael Matty, CFA, CFP, Chief Investment Officer, St. Germain Investment Management Special to PRIME If you spend any time watching the business news, you will typically hear commentators use phrases such as "large-cap stocks" or "small-cap stocks." While people who are familiar with the industry use these phrases quite often, many people find the terminology confusing. "Cap" is a shorthand way of saying capitalization, which refers to the market capitalization of a stock. Market capitalization is the total value of all the outstanding shares of a company. So if you take all the shares of a company, and multiply it times the price per share, you will get the market capitalization. Mega-Cap Stocks Like GE In the case of most large companies, this number is tens or hundreds of billions of dollars. Let's look at General Electric as an example. It has 10.6 billion shares outstanding and a price of about $35 per share. Multiplying these out, we find that GE has a "market cap" of about $350 billion. So if you wanted to buy all the stock of GE and could do so without driving the price up (very unlikely), it would still take $350 billion to do so! By any definition, GE has a big market cap. In fact, companies with market caps in excess of $200 billion are typically referred to as mega-cap stocks. Such stocks include GE, Exxon Mobil, Microsoft, and other such industry titans. Large Caps Like Coca Cola The next tier of stocks includes the large-cap stocks. Just as there is no standardized definition for a "large house" or a "large car," there is no standardized definition for a large-cap stock. But while there is no strict definition, this group is generally accepted to be stocks with a market cap of $10-200 billion. Again, these will typically be fairly well-known companies to many people (Coca-Cola, Walt Disney, etc.). Mid Caps Like Abercrombie & Fitch The next level down includes the mid-cap stocks. Generally, these are deemed to be stocks with a market cap of $2-10 billion. Some may be household names (e.g., Abercrombie & Fitch), others will be much less familiar (e.g., WPS Resources). They may be smaller companies that are growing bigger, or bigger companies that have fallen out of favor. Small Caps And smaller still are the small-cap stocks, with market caps under $2 billion. Some will split this group even further, into the micro caps ($50 million to $2 billion) and even the nano-caps (under $50 million), which are typically highly speculative penny stocks. Unless you are extremely familiar with the industry, or it is a local company, you very likely will know very few of these names. Remember, most start out small! A stock can grow from a small cap to a mid cap and continue to grow right up into a large cap. If really successful, it may even become a mega-cap. After all, most big companies started out small. But don't forget, a big price decline can turn a large cap into a small cap as well. A look at a stock such as CMGI will illustrate this point. At its peak, CMGI had a market cap in excess of $30 billion. Today, it is well under $1 billion. Which type of stock is better for me? While the real answer will depend upon each investor's individual comfort with risk and volatility, here are a few guidelines: Large-cap (and mega-cap) stocks are often referred to as "blue chip" stocks. As mentioned, they tend to be the household names. While not always true, think of them as more conservative, steady and stable the tortoise, not the hare. The mid-cap stocks tend to be more volatile, but such volatility may be acceptable to you, especially if you think we are at a point in the market cycle where a little more risk is a good bet. And the small-cap stocks tend to be the most volatile of all. Again, as long as you can stomach the volatility, they may be a worthwhile addition for a portion of your assets. Column provided to PRIME by: St. Germain Investment management; 1500 Main Street, Springfield, MA. Phone is 413-733-5111 or 1-800-443-7624. web site: www.dgstgermain.com