David John MarottaDavid John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
Host: What is a stocks capitalization?
David Marotta: A stock's capitalization is computed by taking all the outstanding shares and multiplying it times the current share price. So the value that it would take by the entire outstanding shares of the company at the current price. So, capitalization if you will is the the cost of a company itself.
Large cap is generally all the companies that you have heard off. So if you have heard of a company it's probably large cap and large cap has a capitalization of over $5 billion. Mid cap is the $1 billion to $1 billion range. You may have heard of these companies but usually you havent. Small cap is under $1 billion and these are the companies that generally have the higher growth. So it's much easier for a small company to double in size than it is some of these huge companies to double in size. So, when the small company doubles in size the stock price goes up tremendously, the large companies just can't make these kinds of return. Large cap generally makes between 10% and 12%, mid cap generally makes 12% to 14% return and small cap makes between 14% and 18% return. But small cap and mid cap are more volatile then large cap. So, just like adding a little bit of bonds to a portfolio can boost returns or adding a little bit of stocks to a portfolio can boost returns, adding a little bit of small and mid cap can both decrease your volatility and increase your returns and as you add more and more then you start increasing your volatility even more.