Marc Cuniberti Investors can buy groups of stocks based on just about anything. There are funds that contain only technology, or food stocks, or defense stocks, homebuilders, stocks in Japan, or Europe.
You name it, there’s probably a fund for whatever segment or group you might imagine. You can even buy a fund that encompasses stock samplings from around the globe.
Another stock metric is based on the capitalization of each company in a group. Capitalization is simply the amount of shares the company has multiplied by the price of each individual share. Think of it as how much a company is worth.
The common grouping is called small-cap, mid-cap, and large-cap stocks. Small caps are valued at between 250 million and 2 billion, mid-cap from 2 billion to 10 billion and large-caps from 10 billion to 200 billion. There are subsets and outlier groups covering those beyond these ranges but these 3 are the most common. Generally speaking, small-caps are thought of for growth, mid-cap for stability and expansion, and large caps are dependable, well established companies.
Why would an investor care about such things and why are they grouped simply based on size?
It is thought by some that when times are hard and money is tight, large-cap stocks may be safer than small-cap companies due to their sheer size. Large-caps got to be large by usually being around a long time and making a product or service that has garnered such favor as to make the company an iconic behemoth.
In other words, it’s a well proven “whatever”, and probably isn’t going anywhere fast nor going away anytime soon.
Investors looking for safety, whether in times of economic stress or just wishing to invest in the iconic juggernauts of industry, might flock to the large caps for whatever perceived safety this group provides.
On the flip side, the small-cap companies may not be as well known, as well funded nor been around for as long as the large caps, so their market share might not be as mature nor as secure.
This means small caps might have more growth potential than the large-caps, but also might be at more risk in times of economic downturns because of smaller pocket books or not as well-proven products or services that the large caps might have.
Mid-caps fall in between the two so their advantages are self-explanatory. You could say you get the best of both worlds, and the worst, depending on which way the economic wind blows.
It is thought that small caps usually do well when times are good and large caps tend to fare better when things get dicey. Being as such, we can observe the historical movements of each group and deduce when it might be a good time to consider buying into one size group versus another.
Small-cap stocks have been in a long funk lately. In fact, it’s been a near record setting erosion. The persistent downturn in small-caps is one of the longest in 40 years. This may say something about our economy the last couple of years and indeed there may be some validity there. The economy has had its challenges of late.
Keeping that in mind, we must also note the old saying “nature abhors a vacuum”. In simpler terms, when something happens that has a low probability of occurring, nature eventuality tends to gravitate any abnormalities back into their average range again. Or even better said is that when things go out of norm, things will eventually return to the norm.
And a record setting multi-month erosion in small caps is, by definition, out of the norm.
Although we don’t know just how long this current streak of beaten down small-caps will last, history tells us when prolonged downturns occur, they may act like coiled springs and suddenly reverse direction and hurdle upwards. These recoveries can result in healthy gains for the astute investor who sees such things before others do.
Simply put, small-caps may do very well after breaking similar streaks of persistent downturns, and in stocks, sometimes the longer the downturns, the more rewarding the rallies.
It’s too soon to tell if small-caps are ready to break out of their funk, and indeed, there are many things happening in the economy that might suggest not everything is ready to come up roses anytime soon. But the observant investor might keep an eye on this sector. A popular index for small-caps is called the Russell 2000 and you can track its performance under the symbol RUT.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
