Small Cap Vs Large Cap Historical Performance Chart
Investors looking to put their money in the stock market are often faced with the decision of whether to invest in small cap or large cap stocks. Small cap stocks are those with a market capitalization of $300 million to $2 billion, while large cap stocks are those with a market capitalization of more than $10 billion.
What is Market Capitalization?
Before we dive into the historical performance of small cap vs large cap stocks, it's important to understand the concept of market capitalization. Market capitalization, or market cap for short, is the total value of a company's outstanding shares of stock. It is calculated by multiplying the company's current stock price by the number of outstanding shares.
Market cap is used to categorize stocks into different groups, such as small cap, mid cap, and large cap, based on the company's total value. Small cap stocks have a market capitalization of $300 million to $2 billion, mid cap stocks have a market capitalization of $2 billion to $10 billion, and large cap stocks have a market capitalization of more than $10 billion.
Historical Performance of Small Cap vs Large Cap Stocks
Historically, small cap stocks have outperformed large cap stocks over the long term. From 1926 to 2019, small cap stocks had an average annual return of 12.9%, while large cap stocks had an average annual return of 10.2%. This means that if you had invested $10,000 in small cap stocks in 1926, it would have grown to $137 million by the end of 2019, while the same investment in large cap stocks would have grown to $14 million.
However, it's important to note that small cap stocks are more volatile than large cap stocks. This means that while small cap stocks have the potential for higher returns, they also have a higher risk of losing value. Large cap stocks, on the other hand, are generally considered to be less risky, but also have lower potential returns.
Factors Affecting Small Cap and Large Cap Performance
The performance of small cap and large cap stocks is affected by a variety of factors, including economic conditions, interest rates, industry trends, and company-specific factors.
In general, small cap stocks are more sensitive to changes in economic conditions and interest rates than large cap stocks. This is because small cap companies are often younger and have less established business models than large cap companies. As a result, they may be more susceptible to economic downturns and changes in interest rates.
On the other hand, large cap stocks are often more stable and have more established business models. They may also have more diversified revenue streams and operations, which can help them weather economic downturns and changes in interest rates.
Investing in Small Cap vs Large Cap Stocks
When it comes to investing in small cap vs large cap stocks, there is no one-size-fits-all answer. The right investment strategy depends on your individual goals, risk tolerance, and time horizon.
If you have a long-term investment horizon and are willing to take on more risk for the potential of higher returns, small cap stocks may be a good choice. However, if you have a shorter investment horizon or are more risk-averse, large cap stocks may be a better fit.
Ultimately, the key to successful investing is to diversify your portfolio across different asset classes, including small cap and large cap stocks, as well as bonds, real estate, and other investments.
Conclusion
Small cap vs large cap stocks is a common debate among investors. While historical performance suggests that small cap stocks have outperformed large cap stocks over the long term, it's important to remember that small cap stocks are more volatile and carry more risk. The right investment strategy depends on your individual goals, risk tolerance, and time horizon. By diversifying your portfolio across different asset classes, you can help minimize risk and maximize returns.