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INVESTING
APRIL 1, 2020

What is market cap and why should it matter to my investing approach?

Answered by
Nick Giorgi
Investment Strategist, Chief Investment Office, Merrill and Bank of America Private Bank
In a nutshell, a company's market capitalization is the total dollar value of its outstanding shares of stock. It's also a useful tool in understanding a company's potential risk and whether it's appropriate for your investment goals. Watch the video to learn more.
What is market cap and why should it matter to my investing approach?
Market capitalization, or 'market cap,' is really just the value of a company from the market's perspective.
While it is only one factor to consider when investing, it's an important one because knowing a company's worth in the market — where shares are bought and sold — is essential to understanding how much risk is involved if you invest in it.
The math is pretty simple. Multiply the price of a single share of a company's stock by the total number of its available shares and you have its market cap.
So a company with a million shares on the market that's trading at $100 a share would have a $100 million market cap.
Companies are often categorized into three buckets: small cap, mid cap, and large cap.
Small-cap companies have market caps between $200 million and $2 billion. Mid-cap companies — they're between $2 billion and $10 billion. And then large-cap companies have market caps over $10 billion.
Small-cap companies tend to have more growth potential but also more risk because they're less established. Mid-cap companies, they have growth potential, but may still have a level of instability. Large-cap companies have less room to grow, but offer more stability.
Because they offer different levels of growth and risk potential, we recommend that investors look to diversify their portfolios across small, mid and large cap.
Index funds, which track stock market indices across all market caps, can help you target companies that are sized correctly for your needs. If you want more exposure to small cap, for example, there are exchange traded funds, or ETFs, that will track the entire small-cap index and buy a representation of it.
You could also invest with mutual funds, which can be actively managed by professionals with experience finding companies — small, mid and large cap — that are relatively unknown but may offer good value.
Your choices will depend on how comfortable you are with risk, along with other factors. If you can tolerate a fair amount of risk, you might invest in a mix with more small and mid cap, and less large cap.
If you're risk-averse or getting closer to retirement, just a small allocation to small cap might work for you.
By paying attention to a company's market cap, you can better understand the value and risk of potential investments, and are more likely to make choices that suit your circumstances and goals.
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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF).

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as "MLPF&S" or "Merrill") makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation ("BofA Corp."). MLPF&S is a registered broker-dealer, a registered investment adviser, Member Securities Investor Protection (SIPC) popup and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp").
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