Market capitalization is defined as the price of the company’s stock multiplied by the total number of shares outstanding. As stock values change, so does a company’s market capitalization.
It can be argued that a well-diversified portfolio should have holding of different market capitalizations, and there are some distinct advantages and disadvantages to holding a mixture of small and large capitalization holdings.
Some indices and mutual funds attempt to categorize stocks into three broad categories – small cap, mid cap, and large cap. There is no universally accepted definition of these categories.
To provide some examples, we have noted three methodologies below:
- BMO Nesbitt Burns Canadian Small Cap Index: This Index is intended to represent the Canadian small capitalization equity market and includes approximately 400 stocks trading on the TSX. This Index is comprised of stocks with a market capitalization of less than 0.1 per cent of the total capitalization of the S&P/TSX Composite Index. This is an example of a “floating” index and the value would change daily.
- Canadian Investment Funds Standards Committee: The categories are determined by allocation, geography and cap size and are set quarterly. As of December 31, 2010 the thresholds are: Small/Mid Cap Equity: $2.6 billion (CAD), Canadian Focused Small/Mid Cap Equity $3.5 billion (CAD), U.S. Small/Mid Cap Equity $5.5 billion (CAD), Global Small/Mid Cap Equity $4.7 billion (CAD).
- Morningstar US Categories: Giant cap stocks comprise the top 40 per cent of total US market capitalization. Large cap stocks make up the next 30 per cent. Mid-cap stocks are defined as being part of the next 20 per cent while small and micro-cap stocks comprise the smallest 10 per cent of the total US market. The absolute breakpoints are updated periodically to ensure the definitions of each capitalization range fluctuate appropriately with the market. Generally though, market cap breakpoints will be as follows in the US: Giant $40 billion plus; Large $8 to $40 billion; Mid: $1 to $8 billion; Small $500 million to $1 billion; and Micro less than $500 million.
The following are the largest ten companies in the world by market capitalization as of market close on April 21, 2011 (in USD$ billions):
|Exxon Mobil Corp||425.9|
|BHB Billiton Ltd.||262.0|
|Industrial & Commercial Bank of China||259.8|
|China Const BA – H||239.3|
|Royal Dutch Shell||235.6|
The following are the largest ten companies in Canada by market capitalization as of market close on April 21, 2011 (stated in CAD$ billions):
|Royal Bank of Canada||89.5|
|Suncor Energy Inc.||70.7|
|Bank of Nova Scotia||65.3|
|Barrick Gold Corp.||55.0|
|Canadian Natural Resources||50.9|
|Potash Corp of Saskatchewan||49.9|
|Imperial Oil Ltd.||44.9|
|Bank of Montreal||37.4|
Our largest Canadian companies are well down the list when looking at the world. Many companies that we consider large here at home would be small when looking at the total universe of stocks.
There are several benefits to investing in large capitalization stocks. The stocks are often classified as “blue chip” and should provide a combination of growth and income through dividends.
Most large companies in Canada have several research analysts that cover the stocks, which provides greater transparency and different opinions. In declining markets, large companies should exhibit less downside than smaller companies.
Purchasing small capitalization companies can be rewarding in up markets, especially in certain sectors. On the other hand they come with several challenges. Most small companies have either few, or no analysts covering the stock. If only analyst is covering the stock, it’s important to determine if that person is truly an unbiased analyst.
Many pension funds and institutions have investment policy statements in place that state that they can not invest in companies below a certain size. This is for many reasons, including the lack of transparency and liquidity that comes with buying and selling small companies.
If you want small-cap exposure, then purchasing a mutual fund with this mandate may be the best risk adjusted approach. Investors should use caution prior to purchasing small cap companies.