Sidebar to: In Stock Investing, Size Matters

In the stock market, "large-cap" and "small-cap" are insiders’ shorthand for a simple bit of mathematics that tells the overall value that investors place on various public companies.

The formula is simplicity itself. As far as investors are concerned, Microsoft Corp., the company, is worth the current price per share multiplied by the number of shares outstanding. Microsoft currently has 5.1 billion shares; at a price of $78, that makes the company "worth" $398 billion. (Virtually unknown 20 years ago, Microsoft is now the largest company in the United States, by this measure.)

Large-cap and small-cap are ways to measure market capitalization, or the total value that the stock market places on companies. Analysts have various formulas for defining the lines between small-cap, mid-cap and large-cap stocks. And as stock prices continue to rise generally, the division points change in an inflation-like manner. A decade ago, a company with a market cap over $100 billion would have seemed a fantasy; now there are 29.

The graphs that go with the accompanying article don’t rely on any arbitrary dividing points between large, medium and small size. They simply divide all U.S. stocks into 10 equal "deciles" and present them from largest (No. 1) to smallest (No. 10).

Of course there are other ways to measure corporate size; two of the most common are gross revenue and number of employees. And there are usually valid reasons why Wall Street values one company much higher than another.

Here’s an interesting comparison between two big companies:

Traditional "common sense" measurements tell you General Motors is bigger; but the stock market obviously thinks Microsoft is much more valuable.

Second and third behind Microsoft in market capitalization are General Electric at $331 billion and IBM at $207 billion. The next five in order are Exxon ($192 billion), Wal-Mart ($190 billion), Intel ($180 billion), BP Amoco ($179 billion) and Cisco Systems ($177 billion).

At the other end of the size spectrum are small-cap stocks. Many are so small they aren’t well-known outside their industries or geographic regions.

But a few familiar names show up in the ninth and 10th deciles, stocks with market capitalizations under $200 million. Here are a few examples: Audiovox Corp., which makes automotive phone, stereo and security gear ($183 million); Hartmarx Corp., the top U.S. manufacturer of men’s suits ($163 million); The North Face Inc., which makes outdoor clothes and gear ($124 million); Brookstone Inc., which sells high-tech tools by mail and in malls ($123 million); Shoney’s Inc., which runs 1,200 restaurants in 28 states ($108 million); and A.T. Cross Co., a manufacturer of pens and other writing instruments.

Oh, and there’s the Maui Land & Pineapple Co., which we need to investigate in person. It has a market cap of $98 million.

Fortunately, you can take advantage of the size effect without keeping track of individual stocks. Mutual fund managers will do it for you. All you have to remember, as the accompanying article demonstrates, is that when it comes to investing in stocks, size really does matter.