Depending on whom you ask, there are dozens of ways to classify stocks. They can be sorted according to the location of the company, projected growth, and whether their earnings tend to follow a cyclical path, to name a few. These classifications and categories can be helpful to physician investors looking to diversify their portfolio.
The most common way to separate stocks is by worth or, more specifically, by market capitalization. As defined by the Corporate Finance Institute, market capitalization is the most up-to-date market value of the outstanding shares of a company. To determine this value, you take the price of a stock share and multiply it by the number of outstanding shares.
The three main worth-based categories are large cap, mid cap, and small cap. Cap is an abbreviation for market capitalization. According to the Motley Fool, there isn’t a hard and fast line that separates these three categories, however, most financial analysts agree that large-cap stocks have a market capitalization of $10 billion or more. Mid-cap stocks have a market capitalization between $2 billion and $10 billion, and small-cap stocks have a market capitalization of $2 billion or less. Investopedia adds that there is also a category below small-cap stocks known as micro-cap, which has a market capitalization of around $50 million to $300 million.
Large-cap stocks are most often well-established brands with a proven history of profitability. They are sometimes described as safer investments because they have the funding and infrastructure to weather economic downturns. When diversifying your portfolio, it can be helpful to include a healthy representation of large caps to preserve stability. However, investing solely in large-cap stocks has its drawbacks. Because these companies are large and established, their rate of growth may be slower. Your shares, therefore, may not grow at a high rate. For this, you may want to look to mid caps or small caps.
As their name and categorical valuation suggests, mid-cap stocks are the middle of the road in terms of worth, risk, and growth. They may be more poised for growth than their large-cap cousins, but they also have a bit more stability than their small-cap cousins. For this reason, some investors may be tempted to go all in on mid caps, but most investment advisors would caution you from going all in on anything. A good representation of mid caps in your portfolio, however, can be a very good thing.
Small caps, our scrappy little stock category, tend to offer the greatest potential for growth compared to mid- and large-cap stocks. However, with the potential for growth and gains, comes the risk of loss. So, this category of stock can be a good addition to your portfolio as part of a balanced and diversified plan.