Dow Jones Wilshire Large-Cap Index

Okay, so...how do you differentiate between large cap, mid cap and small cap companies?

It’s all about the cap.

That’s market cap, or rather, the value that Wall Street investors are placing on the company’s future earning powers. Simply put, to make categorizing investing in these companies easier, mutual and index funds have somewhat arbitrarily created brackets for the three different sizes of companies. The presumption runs that smaller companies carry more risk, but grow faster than very large companies. Medium companies…yeah, they’re somewhere in the middle. Shockingly.

So what are the numbers? Well, here's how they were created. The first gradation was started at a billion dollars and ended at 5 billion. And many companies grow through all three phases. Take Netflix. (Please...for $9.95 a month.) Netflix came public at a valuation of around $300M. It then grew and grew and grew from being a small cap company to a mid cap when it passed a valuation of $5B, and then continued to grow into the large cap behemoth it is today, at $50B plus. It did well. So Netflix generally kept its number of shares outstanding about flat…but as its stock price rose, the market capitalization rose as well. Or said another way, investors valued the company more and more highly. So Netflix graduated from being a small cap to being a mid-cap a half dozen years or so after it went public, and a half dozen years later, it graduated past the 25 billion dollar threshold to being considered a large cap company.

There is another casual class called mega-cap, which generally comprises companies with market valuations over 100B. These companies are behemoths, like AT&T, Apple, Amazon, and many other companies that don’t start with the letter A.

So that's it...the difference between large, mid, and small cap companies. You'll have to make like Goldilocks and choose the one that's just right for you.