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Large-cap companies have a capitalization of over $10 billion and are well-established, while small-cap companies have a capitalization of less than $5 billion and have growth potential. Large-cap investments are low-risk, while small-cap investments are high-risk but have potential for higher growth. Investors should evaluate prospectuses carefully before investing.
The main difference between large-cap and small-cap companies is the capitalization amounts. Large-cap stocks or funds are invested in large, well-established companies, while small-caps are for small companies with growth potential. Another difference between these actions is that they involve different levels of risk. Investors should evaluate the objectives and risks included in the prospectuses for large and small cap stocks and funds before investing.
Large-cap or large-cap companies typically have a capitalization of more than $10 billion United States Dollars (USD). These companies, sometimes called blue chip companies, have large amounts of shares outstanding and are well established and financially stable. They are also included in the Dow Jones Index and the S&P 500. Examples of large-cap companies are Exxon Mobil, Microsoft, and General Motors.
Small cap, or small cap, generally refers to companies that have a capitalization of less than $5 billion dollars. However, the dollar limit is arbitrary, so it can vary depending on the investment. These small businesses are the ones that are generally not known. Some companies start out as small-caps but eventually reach mid-cap or large-cap status, while others eventually dissolve or go out of business.
Both large-cap and small-cap investments carry risks, but the levels associated with each are different. Large-cap stocks and funds are typically low risk, as companies tend to maintain their financial stability. These companies don’t have as much growth potential as small-caps, so their stocks may not perform as well. In general, low-risk investments do not fluctuate with the ups and downs of the stock market as much as aggressive ones, so they are considered less volatile investments.
By contrast, small-cap companies are not well established, and investing in their stocks is considered high-risk and aggressive. Although with high risk there is the potential for higher growth and profitability than with low risk investments, there is also the potential for businesses to go out of business. Small-cap companies can be particularly risky during periods of economic downturn, as they may not have the financial wherewithal to stay afloat.
The state of the economy often benefits one cap size over others. For example, small-cap funds may be thriving at a time when large-cap funds are not, or vice versa. Some studies have shown that small-cap investments will outperform large-caps in the long run.
Investors wishing to invest in large and small cap stocks or funds should read the prospectuses carefully before investing. The prospectuses will include pertinent information such as objectives, expenses, historical rates of return and risks. For large-cap and small-cap mutual funds, prospectuses will also list which companies they invest in.
Smart Asset.
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