The Difference Between Small and Mega Cap Stocks

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This article is part of our learning series. It will detail to the novice or beginning investor the differences between small- large cap stocks.

Market Capitalization is quite simply, the overall value of the company on the stock market. It can be computed by multiplying the current share price by the number of shares outstanding. For example, a share price of $1 and the number of shares outstanding is 1 million (1 X 1 million) - the market cap is 1 million dollars!

The different "cap" sizes of a company is simply a range that indicates how big the company is.

1) Mega CAP. Are companies with over $200 billion dollars in market cap. These are rare animals indeed. There are no mega cap companies in Canada on the TSX. Apple, Microsoft, Walmart, are American examples of mega cap corporations.

2) Large Cap or Big CAp are generally considered to be companies on the stock exchange with a value exceeding 10 billion. There are many of these and many of these in Canada. The big 5 Canadian banks would all be considered to be Large Cap Stocks.

3) Mid (Medium) Cap. These companies are between 2 and 10 billion dollars in value. There are many many of these in the world and many in Canada. An example of this is Viterra TSE:VT on the Toronto Exchange

4) Small cap companies are considered to have a market value of $300 million and 2 Billion. There are a huge number of these on most large global exchanges.

5) Micro Cap are the companies that trade between $50 - 300 million

6) Nano Cap: the Final Cap size that is used to describe market dollar value is Nano Cap. These are all companies below $50 million in size.

Keep in mind that these definitions are arbitrary. They may differ from person to person, but at Canadastock, these are the accepted descriptors.

Generally, and keep in mind this is a generalization, the larger the CAp, the safer the investment, but the smaller the potential return. For instance and investment in Microsoft MSFT at 200 billion plus cap is not likely to return a 10 bagger (a ten times doubling of the stock). Such a return would place MSFT at 2 Trillion in Market Cap! This is an unheard of capital gain and would not likely ever happen. However, if you purchased MSFT in the 1970s when it was a Micro Cap company, then you would have seen returns of an incredible magnitude to date as they zoomed up to Mega Cap status at the turn of the century.

Alternatively, an investment in a micro or nano cap company can potentially see multi bag performance, but these companies are far more often prone to scandal and bankruptcy. Often many of them are start ups with little or no revenue or profits. Understanding the difference in these caps is one of the very important lessons a budding investor must learn.