When I was in the 6th grade, I will always remember the first day we had to “dress out” for P.E. Class. This was the first time dropping my drawers to ANYONE and it was extremely intimidating. As soon as I did, one other students (terrorist) immediately pointed and said, “look at him, he’s wearing whitey tighties!” The whole locker room erupted in laughter and instantly thought, “how could you do this to me mom?” and I wept.
Growing up I wasn’t the most popular kid in school but I gained momentum over time. Every school has their jocks, their prom queens, their “you cant sit with us” crowd along with their geeks, their nerds, their “get shoved into lockers” crowd. In today’s article, I’m going to be explaining how these crowds can be found in the stock market as well.
Stocks are classified in many ways, but some one of the most popular differentiations is between large cap and small cap companies. Large cap stocks are companies with a market capitalization of more than $5 billion. These companies are your jocks of the stock market. They are very popular, have been around for years, and are very attractive to most investors. They are a BIG company that has shown it is one of the top dogs in its market. Think Apple, IBM, or Amazon. These companies are said to be safer because of their long standing history than our the next category, small-cap.
Small-Caps are companies with a market capitalization of less than $2 billion. These are your geeks of the stock market. Even though these companies do not have as long of a track record and aren’t as well known, they are thought of to have high growth potential. Small-caps could eventually turn into large-caps. This is like Tom the four-eyed geek who plays with a rubix cube, growing up to cure cancer. Even though he is not popular now, after he develops the cure, his popularity and attractiveness skyrockets (he probably wears white-tighties every day too). These are companies that have recently IPO’ed and are starting to gain traction. Think Shake Shak or Weight Watchers. Small caps are said to be riskier because they do not have a proven track record of success. They could become big but they could also falter and do nothing their rest of their lives. (Like sit at home and play video games)
A well diversified portfolio is composed of both geeks and jocks. The more you put into geeks, the more risk you will be taking on but you also have the chance for higher reward potential. Understanding what kind of market capitalization a company has can give you a good indication how just how much or likely it will grow.
Homework: Look up 3 small-cap companies and 3 large cap-companies. Compare how they have been doing over time. Is it time to invest in some jocks or some geeks?