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SMALL CAP? LARGE CAP? WHAT DOES IT MEAN?
05/14/2018

In a recent investor alert, FINRA offers novice investors an explainer regarding market cap. You may hear companies described as large-cap, mid-cap or small-cap. Certain stock indexes or investment funds will use this measure to group companies together by size. For example, the S&P 500 is made up of large-cap stocks and is weighed by market cap, so companies with a higher market cap account for relatively more of the index than companies with a comparatively smaller market cap. Meanwhile, the Russell 2000 Index is a small-cap stock market index. Newer investors might mistakenly believe that stock price alone could be a good indicator of how large a company is, but what is most important in determining a company's size is the number of shares outstanding. But here's something important to keep in mind: because stock price is determined by investors, market cap is the perceived value of a company. It isn't necessarily the actual value of a company and all of its parts. Some of that perceived value may stem from expectations of future growth or the introduction of a product, but those expectations may not pan out, in which case the share price of the company—and thus it's market cap—is likely to adjust accordingly … HIGHLIGHTED EVENT:Want to learn more about investing? Attend an AAII Local Chapter Meeting near you

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