Big, Mid or Small Caps?

Market capitalisation, or the ratio of the number of shares to the price of a single share, basically tells us how much a company is worth on the stock market and defines its size.

On the US market, a market capitalisation of more than USD 10 billion identifies the so-called large caps, i.e. companies that are large in size and are therefore considered to be more solid and theoretically less volatile.

Going down the capitalisation scale, we find the Mid Caps, with a market capitalisation of between USD 2 billion and USD 10 billion, and finally the Small Caps, with a capitalisation of between USD 300 million and USD 2 billion. The latter are small companies with great growth potential but higher risk.

Many studies show that small caps are favoured by investors when the business cycle is in the early stages of expansion. Towards the end of the cycle, however, large caps tend to be favoured because they are better able to withstand the onset of a recession. Understanding which size investors are betting on can therefore give an indication of the prevailing interpretation of the business cycle phase.

This is the information we try to summarise in our analysis of capitalisation size using three major US indices.