Large Cap vs Mid Cap vs Small Cap Stocks

Three details matter when you read these numbers:

• They apply to new members only.A company already in an index is not removed just because its market cap drifts outside the range, so you will find S&P MidCap 400 members larger than some S&P 500 members.
• They move with the market.S&P reviews the ranges at the start of every calendar quarter. In its March 2015 methodology the small-cap range was $400 million to $1.8 billion and the large-cap minimum $5.3 billion.
• Size is not the only test.To be added to any of the three, the sum of a company's last four quarters of GAAP earnings must be positive, and so must the most recent quarter. Liquidity and float requirements apply too.

By S&P's current guideline, a small-cap company is worth $1.2 billion to $8.0 billion when it joins the S&P SmallCap 600. You will also see rules of thumb such as $300 million to $2 billion; those are conventions, not index rules. S&P sets its ranges to capture fixed percentiles of total market value, so the dollar figures rise as markets rise: its small-cap range in 2015 was $400 million to $1.8 billion. Companies below the small-cap range are usually called micro caps.

The three indices do not overlap and are built on one set of rules, so together they form a single ladder of U.S. companies by size:

• S&P 500: 500 large companies, about 80% of available U.S. market capitalization by S&P's count.
• S&P MidCap 400: the next 400, mid-sized companies.
• S&P SmallCap 600: 600 small companies.
• Combinations: the S&P 500 and MidCap 400 form the S&P 900; the MidCap 400 and SmallCap 600 form the S&P 1000; all three form the S&P Composite 1500, which S&P says covers approximately 90% of U.S. market capitalization.

Because each index is weighted by market value, the S&P 500's largest members dominate the whole set: a dollar in an S&P 1500 fund is mostly a dollar in large caps.

Business stage. Large caps tend to be established leaders with long financial histories. Small caps are more often single-product or regional businesses, with more room to grow and more ways to fail.

Price swings.Smaller companies' shares usually move more, in both directions, than large caps'.

Trading costs. Small caps trade less, so bid-ask spreads are wider and large orders move the price more. The difference matters for anyone who trades often.

Attention. Fewer analysts follow small and mid caps than large caps, so less is written about them. That cuts both ways: less coverage can mean more mispricing, and less scrutiny.

Returns. In 1992, Eugene Fama and Kenneth French found that smaller stocks had earned higher average returns than larger ones. Whether that size premium is still there is disputed, and long periods have favored large caps. We compare the record in midcap vs large-cap returns; past returns do not predict future ones.

Mid caps sit between the two: by S&P's guideline, $8.0 billion to $22.7 billion at entry. Many are former small caps that grew, with longer records and more financial room than small caps but still more room to grow than most large caps. The trade-offs above (swings, trading costs, coverage) generally fall in between as well. Our mid-cap investing guide goes further.

AlphaStocks scores the members of all three S&P indices, plus top ADRs, with the same five models, so a score means the same thing for a small cap as for a mega cap. A model that does not fit a company (a bank, a REIT) is left out of its score rather than scored as zero; the sector profilesexplain how. The score describes a company's fundamentals and momentum; it is not a forecast.