There's no two ways about it; somewhere, sometime, you will run into about a million terms that mean absolutely nothing to you when you start investing. Indexes, accumulation, growth, income and balanced are just a few of the thousands of words used by financial planners to describe the investments they suggest.
To give you a start on that first meeting with your financial advisor, or when you start looking at the choices in your 401(k) plan, we thought you might like to know what the investment pros mean when they talk about Large Cap, Medium Cap and Small Cap stocks.
Hint: We're not talking about baseball caps.
If you want to understand these terms, you must first understand the 'Cap' part. 'Cap' is short for capitalization. When your financial advisor talks about capitalization, he or she is talking about the market capitalization of a particular stock. Market capitalization is basically the number of shares of a company's stock multiplied by its market price. For example, the market capitalization of Intel Corporation at April 25, 2003 was approximately $119,620,000,000. Taking the closing price on April 25, 2003 of $18.28 per share and multiplying it by the approximately 6,544,000,000 shares outstanding gives you this number.
Be careful not to confuse the market capitalization of a stock with the stockholders' equity you might see on the financial statements of a company. The amounts you will see in the financial statements basically reflect the cost of assets less liabilities. Purists might want to qualify this definition for various accounting related adjustments, but for our purposes, this is a good working definition.
Using Intel again, the value of outstanding shares of Intel at December 28, 2002 (its fiscal year end) was approximately $117.6 billion according to its report to the Securities Exchange Commission. Its total stockholders' equity at that date was approximately $35.5 billion. Quite a difference, isn't it? That's because the market is more concerned with 'value' than with historical costs. Oftentimes, the two are quite different.
So, what are the various categories of stocks and how are they defined? Everybody has a slightly different definition, but there are a few rules of thumb that you can use.
Large caps are generally those companies with a market capitalization of $5 billion or greater. Companies like General Electric, General Motors, Intel and other major corporations fall into this category. A finer distinction is sometimes drawn by labeling any company with a market capitalization of over $25 billion as a Giant cap stock.
Medium caps are generally those companies with a market capitalization of between $1 billion and $5 billion. Some better-known names that fall in this category are Winn Dixie Stores and Tootsie Roll Industries.
Small caps are generally those companies with a market capitalization of between $250 million and $1 billion. Some of the companies that might fall in this category are Coinstar, Inc., Commonwealth Telephone Enterprises and Vail Resorts.
Just like there is a finer distinction for large cap stocks, micro cap stocks are a group of small cap stocks with a market capitalization of less than $250 million. Stienway Musical Instruments., Frontier Airlines and Nobel Learning Communities, Inc. are just a few of the many companies that fall in this category.
It is important to note that not all companies are created equally. There are many foreign companies that you might think should fall into a large cap category, but are really considered medium cap or perhaps small cap. This is because when the experts define the various categories, they only include ADRs (American Depository Receipts) in the market capitalization. American Depository Receipts are the securities used by foreign companies to make it easy to trade in their stock on U.S. exchanges. Though not technically the same, for all intents and purposes, ADRs are the same as shares of stock.
This ends our short discussion of just a few definitions from the investing world. Next month, we will continue on with a few more definitions, but don't let a lack of understanding hold you back. The simple fact is we are here to give you the advice and support you need to make the most of your money. If you have a question, just call. We are only a phone call away and ready to help you any way we can.
Finally, last month, we asked you to keep the Coalition forces in your thoughts and prayers. Apparently, you did, based on the results. Thanks.
Have a great May!