Small Cap vs Large Cap Stocks: Which Should You Invest In?
Large cap, small cap, ETF, VanGard…it’s easy to get confused by all of the investment terminology. People tend to see investment terms as some secret code they haven’t cracked yet. Well, all that’s going to change today.
In this article, we’re going to talk about small cap vs large cap stocks. We’ll go in-depth about what each type is and how they typically perform.
By the time we’re done here, you should be able to decide if investing in small cap stock is the right move for you.
But, we have a lot of information to cover, so let’s get going.
Small Cap vs Large Cap Stocks
So, what is the difference between large cap and small cap stocks? Well, the biggest difference is the amount of money that the companies have available.
Large cap is an abbreviation for “large capitalization”. Small cap is an abbreviation for “small capitalization”.
Don’t get thrown off by the word “capitalization”. It may seem like a fancy investment term, but all it means is the amount of money a particular company is worth. You may sometimes hear it referred to as “market cap”.
Essentially, when you’re looking at small cap vs large cap stocks, you’re looking at the size of a company.
Large cap stocks, since they’re bigger, are generally more stable. These stocks will grow, but they grow at a slow and steady rate. But, they can still lose as much money in a downturn as a small cap stock.
Naturally, if large cap stocks deal with large companies, small cap stocks deal with small companies.
We already discussed the stability of large cap stocks. If you’re looking for slow, steady growth in your portfolio, large cap stocks are the answer.
The best strategy is to look for “blue chip” large cap stocks. Blue Chips are your huge, long-standing, corporations. These are companies like Coca-Cola, McDonald’s, and Walmart.
The benefits of blue chips are twofold. First, you’ll get the slow, steady, and stable growth of a large cap stock. And, secondly, most blue-chip stocks will pay you a dividend. This is “passive income” that you’ll receive regularly based on the company’s performance.
If you’re just starting on your investment journey, you may want to consider small cap stocks. Again, they deal with smaller companies. As a result, they are a little riskier.
But, like with any investment, higher risk means higher reward. Usually, when an investor first starts their portfolio, they’re willing to take on more risk to achieve more growth. Some retirement vehicles work in exactly that same way.
Certain employers will offer Target Date Funds as a retirement option for their employees. The “target date” will be your retirement date. The way the fund works is that it starts out putting your money into more aggressive investments (like small cap stocks or funds).
Then, as you near retirement, your investment portfolio will transition to more conservative, slow-growth investments.
Whether comparing small cap vs large cap stocks, size does matter. Ultimately, deciding which option is best for you is a personal decision.
Please keep in mind that this article isn’t investment advice. It’s just an account of what’s been experienced by millions of investors in the market.
What do you think? Did this change your perspective on investing? Leave feedback for us in the comments and let us know.