Market capitalisation (market cap) is the total value of a company’s shares. It’s used to categorise stocks by size, which affects risk and return profile.
Market Cap Categories
| Category | Market Cap | Examples |
|---|---|---|
| Mega-cap | £200B+ | Apple, Microsoft, Nvidia |
| Large-cap | £10B-£200B | Unilever, BP, Lloyds |
| Mid-cap | £2B-£10B | Greggs, ASOS, Fever-Tree |
| Small-cap | £300M-£2B | Various |
| Micro-cap | £50M-£300M | Various |
| Nano-cap | Under £50M | Very small companies |
Large-Cap Stocks
Large-caps are established companies with stable earnings.
| Pros | Cons |
|---|---|
| Lower volatility | Lower growth potential |
| Regular dividends | Limited upside |
| High liquidity | Track the market |
| Analyst coverage | Well-known, no edge |
| Less risk of bankruptcy | Less exciting |
Best for: Core portfolio position, retirees, conservative investors.
Mid-Cap Stocks
Mid-caps are growing companies with established business models.
| Pros | Cons |
|---|---|
| Higher growth potential | Higher volatility |
| Often acquisition targets | Less analyst coverage |
| Room to become large-caps | Can fall back to small-cap |
| Good growth/value balance | Risk of stagnation |
Best for: Balanced portfolios, growth-oriented investors.
Small-Cap Stocks
Small-caps are younger companies with higher growth potential.
| Pros | Cons |
|---|---|
| Highest growth potential | Highest volatility |
| Market inefficiencies | Low liquidity |
| Undiscovered gems | Higher bankruptcy risk |
| Lower analyst coverage | Fewer dividends |
| Can 10x in value | Can go to zero |
Best for: Aggressive growth, long time horizons, small allocation.
Historical Performance
| Category | 10-Year Return | Volatility |
|---|---|---|
| Large-cap (S&P 500) | 12.5%/year | 15% |
| Mid-cap (S&P 400) | 11.8%/year | 18% |
| Small-cap (Russell 2000) | 9.5%/year | 22% |
Small-caps have not outperformed large-caps in recent years, contrary to historical trends.
How to Invest by Market Cap
| ETF | Exposure |
|---|---|
| VWRP/VWRL | Global large/mid-cap |
| EQQQ | US mega-cap (Nasdaq) |
| IUSP | US large-cap (S&P 500) |
| MIDD | UK mid-cap |
| IUMI | US small-cap |
| CFP | Global small-cap |
Portfolio Allocation by Cap Size
| Investor Type | Large-Cap | Mid-Cap | Small-Cap |
|---|---|---|---|
| Conservative | 80% | 15% | 5% |
| Balanced | 60% | 25% | 15% |
| Aggressive | 40% | 30% | 30% |
The Size Premium
Historically, small-cap stocks have outperformed large-caps over very long periods (the “size premium”). However:
- The premium has diminished over the last 20 years
- It comes with higher volatility and drawdowns
- Small-caps underperform during recessions
- The premium is inconsistent year-to-year
Bottom Line
Market cap matters for risk and return expectations. Large-caps for stability, mid-caps for growth potential, small-caps for high-risk/high-reward. Most investors should have the majority in large-caps with a mid-cap allocation. Small-caps are optional and should be limited to 10-20% of a portfolio.