Stocks · Intermediate · 5 min

Small, mid and large caps

You can explain how stocks are grouped by size, how index providers draw the lines, and how size affects liquidity, spreads and swings.

Giants and the rest

The stock market is not a crowd of similar companies. It is a few giants, worth hundreds of billions each, and thousands of small companies, some worth less than a large office building.

They share the same exchanges and the same trading hours, but they behave very differently. That is why investors group stocks by size, and why it matters which sizes a fund or index actually contains.

Size by market value

Size means market capitalization: the share price times the number of shares, usually counting only the free float. Investors speak of large caps, mid caps and small caps. A large-cap stock belongs to one of the largest companies in a market, a small-cap stock to one of the smallest that are still listed and tradable.

There is no single legal definition. Each index provider draws its own lines. MSCI uses coverage targets in every market:

Large caps: the largest companies that together make up about 70% of the free-float market value.
Large and mid caps together: about 85%. This is what the MSCI World covers.
Including small caps: about 99%, in MSCI's broader investable market indices.

In the US, S&P Dow Jones Indices publishes separate indices for each size, with the S&P 500 for large caps and further indices for mid and small caps.

Size changes how a share trades:

Liquidity: small caps trade less, so order books are thinner and spreads wider.
Swings: small companies often depend on fewer products, customers or loans, and their prices tend to move more.
Information: fewer analysts follow small companies, so less research is available.

A large-cap index is dominated by a few names. A small-cap index spreads its value over many more companies.

Same order, different impact

A fictional investor buys shares worth 20,000 in two companies.

Large cap: the best ask has shares worth several hundred thousand waiting. The order fills at the best price, and the spread is 0.02%.
Small cap: the best ask has shares worth only 5,000. The order walks through four levels and fills on average 2% above the first quote. The spread was 1.5% to begin with.

Selling later costs the spread again. For the small cap, the round trip costs several percent before any price change. A limit order would have avoided walking the book, at the cost of possibly not being filled completely. In small caps, that trade-off from the lessons on order types matters much more than in large caps.

Common mistakes

Thinking a world fund holds everything. The MSCI World leaves out small caps.
Using market orders in small caps. Thin books make slippage large.
Assuming small means cheap. Size says nothing about valuation.
Ignoring concentration in large-cap indices. A few giants can drive most of the result.
Expecting the same research as for giants. For small companies, you often have to read the reports yourself.

The takeaway

Companies are grouped by market value. Small caps are more numerous, less liquid and more volatile than the few giants that dominate the indices.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the group with the most companies but the smallest share of market value.

Tap the chart.

Small caps are numerous, but each one is small. Together they cover only a small part of the market's value.
2How does MSCI define its large cap segment in each market?

MSCI uses coverage targets: about 70% for large caps, about 85% for large plus mid caps, and about 99% including small caps.
3Why are spreads usually wider for small-cap shares?

Less trading means fewer orders near the price, as covered in the lessons on order books and spreads.
4Does a fund on the MSCI World give you small caps?

Small caps are in separate indices, such as MSCI World Small Cap, or in the broader IMI versions.

of 4 correct.