Why invest in US Equities by Market Capitalization?
Market capitalization refers to the market value of total outstanding shares of the company and is one of the most fundamental investment styles:
- ‘Large cap’ generally refers to companies with market value of $10 billion and above
- ‘Mid cap’ generally refers to companies with market value between $2 billion to $10 billion
- ‘Small cap’ generally refers to companies with market value less than $2 billion
The whole idea of using market capitalization for investing is based on the premise that the size of the company helps in assessing business risk vs. returns outlook.
For instance, large cap companies are considered to be more stable, with established brands and businesses, a long history of paying dividends and slow but steady growth. Such companies are expected to be more conservative investments as compared to mid-cap or small-cap stocks that are expected to generate more accelerated growth and potentially higher returns.
Nevertheless, there could also be some large cap companies that offer attractive growth opportunities or conversely, small cap companies that operate in niche consumer markets and are undervalued. In this context, a sub categorization related to market capitalization includes:
- Companies that are poised for ‘growth’ in Revenue or Earnings
- Companies that are considered to be undervalued, or ‘value’ stocks, where value is measured in terms of P/E ratios, Price to Book value or dividend yield.
- A ‘blend’ of mix of both ‘growth’ and ‘value’
Key Indicators to consider before investing
- Financial goals
- Investment time horizon
- Risk Appetite
- Economic headwinds
US Equities – Calendar Year returns by Market Capitalization since 2009
US Equities – Quarterly returns by Market Capitalization since 2009