Choosing the Right Capitalization Is Key

Physician's Money Digest, July 2006, Volume 13, Issue 7

One size usually doesn't"fit all" and especiallynot when it comes to thestock market. Choosingthe right sized companyor fund can be a tricky prospect."How are the different levels defined?"and "What are the pros and cons ofeach type?" are two major questionsmany physician-investors have. Whendealing with market capitalizationand deciding which size is right, itcan be a tough choice, so here's anoverview of all three major categoriesof market capitalization.

Small Caps

Small cap stocks are companies thattypically have a small market capitalization(ie, usually somewhere between$300 million and $2 billion, but definitionsvary). Market capitalization, simplyput, is the price of the company'sstock, multiplied by the number ofshares outstanding. It's basically thevalue the market places on a company.

With the potential for growth,comes the potential for risk as well. Allportfolios should be properly diversifiedto help reduce overall portfoliorisk. Investing in small cap stockscomes with an additional set of risksunique to these types of investments;consequently, any money you invest insmall caps should be money you'reprepared to expose to these risks.Small cap stocks are also more difficultto research and choose precisely becauseof their obscurity.

Mid Caps

The definition of a mid cap variesgreatly depending upon who you ask.Some define mid caps as companieswith a market capitalization between$1.5 billion and $5 billion. Othersbump that number up a bit and definethem as being between $2 billion and$10 billion. In the end, it depends onexactly who you ask. Mid caps aregenerally thought of as a happy mediumbetween the growth of a small capand some of the stability of a large cap.

Large Caps

Large caps also vary in range,depending on who's defining them. Inmany cases, large caps, or "blue-chip"stocks, are stocks with a market capitalizationbetween $8 billion and $200 billion.This range includes some of thegiants. With large cap companies, youget more proven stability and lessvolatility. But in many cases, that meansless glamorous returns and a smallerchance for growth.

As with the other two levels of capitalization,it's not one-size-fits-all. Someinvestors want the proven reliability ofthe big names, especially when they arenearing retirement. Others value thelarge caps because they've already experiencedtheir growing pains, and arenow established. Many large cap companiesalso do a great deal of workaround the world, which means anadded flavor of global diversification.Numerous developing countries are seeingthe birth of a middle class (eg,China, Brazil, etc), and many large UScompanies are seizing the opportunityand expanding their reach.

Each type of market capitalizationcategory comes with its own uniquerisks and rewards. Trying to balance therisks and rewards of all of the assets inyour portfolio can be tricky. Consultingwith a financial professional can helpyou identify which investments may beappropriate for your situation.

Robert Valentine, CSA, of HuntingtonBeach, Calif, is with Financial and RetirementManagement, a registered investmentadvisory firm. He is a registered representativeof and offers securities throughSecurities America, Inc, and is a registered broker/dealer,member NASD/SIPC. He welcomes questions or commentsat 877-732-2637.