Sometimes, investment terminology is tossed around without really being explained…large-cap, small-cap, mid-cap - what exactly do they mean?
First of all, let's define asset classes. They're the categories that your different investments fall into - basic ones include cash, bonds, large-cap stocks, small-cap stocks, and international stocks, though there are a number of other more specific permutations. Studies have shown that the key to successful investing is to spread your wealth among different asset classes.
Because large-cap stocks have shown outstanding performance recently, you may have heard that investing in them would have been your best bet. But do large-cap stocks ALWAYS perform better than mid-cap and small-cap? Let's take a look.
Market-cap quandary
To review, market capitalization (market cap) is a measure of the size and value of a company. To determine market cap, you simply multiply the number of the company's outstanding shares of stock by the market price of one share.
For example, let's say a company has 50,000,000 shares outstanding, and each share is currently selling for $50. The company's market cap would be 50,000,000 multiplied by $50, which equals $2.5 billion.

And why is market capitalization important? Because history has shown us that the stocks of companies with different market caps behave differently in terms of return and risk.
What exactly are small-cap, mid-cap and large-cap stocks?
Generally "mid-cap" refers to stocks of companies having a market cap between $1.5 billion and $10 billion. One well-known example is Starbucks. Small-cap stocks are companies that have a market cap of less than $1.5 billion. Ann Taylor Stores is one example.
Large-cap stocks are generally defined by the company having a market capitalization greater than $10 billion. An example of a large-cap company is Safeway.
Different market-cap, different performance
Now that we understand what market cap means, let's talk about the performance of different-sized-market cap stocks. We know that over the past few years, large-cap stocks have performed very well.
Continue reading "Small- and Mid-Cap Stocks: Bigger Isn't Always Better" »
Ever wonder why the stock market goes down on good economic news and up on bad--why, for instance, a report of soaring job growth can send Wall Street into a tailspin, while a lazy rate of job creation can spark a rally? It's not mere perversity; the market's movements depend on myriad economic circumstances, even if the relationship sometimes seems to defy logic.
1 Buy a stock just because it is, say, 40 to 50% off of its highs. At first impression, this might make sense to take this approach. A company like Baskin and Robins is one that you know. A store is right around the corner from you. They issue a warning that they are having a problem with a supplier. Because of peek demand they have not been able to provide enough products and their earnings will be off this quarter. Their stock plunges. This appears to be a good opportunity to pick a bargain so you buy.
Here are some basic investment concepts that are good to know.
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