Large Cap Versus Small Cap Stocks and How to Trade Them

By: Montana Timpson

Publicly traded companies are often segmented by their market capitalization — in short, the total value of their shares in the market. These segments primarily classify companies into “large cap” or “small cap” tiers, among others like “mid” and “mega” caps.

Here’s your professional guide to market capitalization, differences between large and small cap stocks and things to consider when trading both types.

Market Cap
Market cap is a measure of a company’s value that investors are placing on the company at a given point in time. To calculate market cap, current stock price is multiplied by the number of shares a company has outstanding — finding the measure of a company’s value that investors are placing on the company at a given point in time and the total dollar value of a company’s outstanding shares of stock. Outstanding shares reflect all shares, including those available to general investing public and restricted shares held by and available to specific groups.

The formula for market cap computation is as follows:

Market Capitalization = Number of Shares Outstanding x Price

Based on calculated current market cap, publicly traded companies are classified into large cap, mid cap and small cap tiers.

Defining Cap “Tiers”
The definitions of large cap — also referred to as big cap — and small cap companies differ slightly, but the current approximations are as follows:

Mega cap: Market cap of $200 billion and greater

Large cap: $10 billion and greater

Mid cap: $2 billion to $10 billion

Small cap: $300 million to $2 billion

Micro cap: $50 million to $300 million

Nano cap: Under $50 million

These definitions, notably, are relatively fluid — for example, for some notable brokerages, companies with market caps greater than $100 billion are seen as mega caps.

Small Cap Stocks
Small caps have fewer publicly traded shares than mid or large cap companies. As mentioned earlier, these businesses have between $300 million and $2 billion of the total dollar value of all outstanding shares — those held by investors, institutional investors and company insiders.

One misconception people have about small caps is that they’re closer to startups, but in reality, many small-cap companies have strong track records, are well-established and have strong supporting financials. The benefit to professional investors seeking small cap exposure is that smaller, small-cap share prices have a greater chance of growth than many large cap shares, though small cap stocks tend to be more volatile and riskier investments.

Large Cap Stocks
Large cap stocks, in contrast, tend to be less volatile during rough markets as investors become more risk averse. Large cap stocks are generally perceived as more stable and mature investments than their smaller counterparts. Additionally, large caps tend to operate with more market efficiency, trading at prices that reflect the underlying company, and often trade at higher volumes than small cap stocks.

Strategies for Trading Large Cap vs. Short Cap Stocks
In general, there is no major difference between trading large cap and small cap stocks. Market movement tends to occur due to similar reasons between the two like earnings and news of the day. The real difference between trading the two is that many share prices of large cap stock companies tend to be expensive. Still, active traders are able to trade these stocks using leverage and fractional trading.

When trading both large and small cap stocks, there are a few key strategies professional traders can implement to help with the likelihood of their trade success.

Utilize Level 2 Data
Level 2 is a tool provided by many brokers, including Lightspeed Financial Services Group. The tool shows the movement of bid and ask prices of a stock, and this data can help suggest optimal times to buy or short various large and small cap stocks.

Implement Additional Trading Tools
Watchlists, social media data and live news streams can be great resources when trading both large and small cap stocks. Lightspeed offers a litany of external trading tools including TipRanks, Social Market Analytics, Inc., eSignal and Trade the News to bolster market data accessibility for professional traders trading large and small cap stocks.

Incorporate Technical Analysis Tools
Last but not least, technical analysis can be a huge asset when trading large and small cap stocks. Tools like Bollinger Bands, Keltner Channels and VWAP bands can all serve as helpful charting indicators of sharp price movements when tracking both large and small cap stocks.

Maximizing Risk Aversion
It’s important to note that systematic risk is inherent in trading small cap and even large cap stocks. To help mitigate threat, many professional investors choose to adopt risk management software to help automate the risk analysis process and manage risk exposure across markets and asset classes in real-time.

Risk management is a crucial process used to make investment decisions involving identifying and analyzing the amount of risk involved in an investment, and either accepting that risk or mitigating it. The Lightspeed Risk Suite, for example, is a collection of risk management applications that allow users to monitor profit, loss, halted trading symbols and real-time trading activity.

For more information regarding the Lightspeed Risk Suite, contact a member of our team at [email protected]. For more professional trading insights, check out Lightspeed’s Active Trading Blog and register now for our next live webinar.

Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.

For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo, or open an account.

Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content are solely based on the users’ independent analyses taking into consideration your financial circumstances, investment objectives, and risk tolerance.

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