Stock Markets and The Size Effect

There's real value in understanding market capitalization!

Large-cap, small-cap and mid-cap stocks all perform differently, and their sizes change. That's why you need to follow market capitalization -- the total value the stock market places on a company.

Market capitalization refers to the total value the market puts on a company. It's calculated by multiplying the price of a stock by its total number of shares.

stock market size effect

So the concept of market capitalization is straightforward and pretty simple to grasp. The reason you want to know about it is that different sized companies perform differently. The details of how that happens, though, are not so clear.

Many studies have shown that small firms (capitalization or assets) tend to outperform large ones. Other studies have argued that it is not the size that matters, but it is the attention and number of analysts that follow the stock.

Anyway, "The Size Effect" is subject to intense debate over whether an opportunity to generate excess returns actually exists, or that its not reasonable to assume that investors can realize those returns.

Small stocks typically have large spreads, thus providing large trading opportunities. On the other hand, it is not easy to be bought by institutional managers without significantly affecting the share price.

Therefore, even so called "small company" funds have difficulty taking advantage of small capitalization stocks.

The point being that you couldn't really buy them in large quantities, if at all, at their quoted price.

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