What does market capitalization mean and why is it important?

Why is market capitalization important?

Market capitalization helps investors to diversify their investment portfolio in a targeted manner. The following elements must be taken into account:

• Evaluation of company size: market capitalization provides an indication of the size of a company compared to others.
• Risk assessment: as a rule, the larger the company, the lower the investment risk.
• Diversification: knowing the market capitalization allows investors to better diversify their portfolio. Investing in a mix of large, mid and small caps helps to spread the risk. For example, funds and ETFs that focus on different market capitalizations such as the SPI Extra (for small and mid caps in Switzerland) facilitate a balanced investment strategy.
• Investment decisions: listed companies are often divided into indices based on their market capitalization. In Switzerland, for example, the 20 largest companies (large caps) are represented in the SMI. Mid caps are represented in the SMIM and small caps in the SPI Extra.
• Long-term growth: companies with smaller market capitalization often offer higher potential growth, albeit with greater risk. With small caps and mid caps in Switzerland in particular, investors can benefit from the small cap premium, which shows that smaller companies can often achieve higher returns in the long term.

Overall, market capitalization helps investors to find the right balance between risk and potential returns in their portfolio. You can find further examples of diversification in the article “Diversification: Why is it important?”.

What’s the difference between small, mid and large caps?

Classifying companies based on their market capitalization gives investors an indication of their risk and growth potential.

• Large cap: usually companies with a market capitalization of over USD 10 billion. These are generally established and safe investments, often referred to as “blue chips”. These include the largest and most liquid securities on the Swiss stock market, such as those represented in the SMI. Large cap companies such as Nestle or Novartis are generally considered to be more stable because they have established business models and a solid financial basis. They often also pay dividends, which is why they are attractive for more conservative investors. However, their growth potential is rather limited.
• Mid cap: companies with a market capitalization between USD 2 and 10 billion. They offer a balanced risk/return ratio, with higher growth potential than large caps, but more security than small caps.
• Small cap: these companies have a market capitalization between USD 2 and 10 billion. They offer high growth opportunities, but also high risks. They are particularly interesting for investors who are prepared to assume a high risk in order to achieve higher potential returns.

How is market capitalization calculated?

To calculate the market capitalization of a company, the total number of shares outstanding is multiplied by the current market price per share.

If company XYZ has 50 million shares in circulation and the current price per share is CHF 10, the calculation is as follows:

50 million shares x CHF 10 = CHF 500 million.

Small cap premium: more opportunity for returns with smaller companies

The “small cap premium” refers to the fact that shares in smaller companies can offer more potential returns. A glance at the The link will open in a new window SPI Extra Index on six-group.com shows how attractive small and mid caps can be. It consists of around 191 small and mid cap shares listed on the Swiss stock exchange. The SPI Extra has generated returns of 20.9% over the past five years.

On the one hand, this may be due to the fact that some companies in the SPI Extra have particularly high growth rates. On the other hand, smaller companies also have shorter decision-making processes. This means that they can act faster and react to market requirements.

Yet many Swiss investors invest predominantly in national and international blue chips. They run the risk of not diversifying their portfolio sufficiently. By investing in small and mid caps, investors can diversify their portfolio to include different sized companies.

Investing in small and mid caps – funds and ETFs as an entry point

Investing in smaller companies is not as difficult as some people might think. For investors who want to invest in small and mid caps, there are funds and ETFs specializing in Swiss small and mid caps, for example. These products allow investors to tap into the growth potential of small and medium-sized companies with limited capital, while avoiding the risks associated with individual shares.

But you should always bear in mind that the past performance of a fund is not a reliable indicator of future performance. You should therefore regularly check whether your portfolio matches your personal investment strategy.

Advantages of small and mid cap funds

• Diversification: funds and ETFs spread the risk across many companies.
• Easy access: even small investors can invest in companies with a lower market capitalization.
• Exploit potential: funds and ETFs specializing in Swiss small and mid caps offer access to growth companies from various sectors.

These are particularly interesting for investors who want to diversify their portfolio internationally.

An overview of the most common types of funds can be found in the article “What different types of funds are available?”. Investors who want to invest internationally can also choose from a variety of small cap funds from other industries or countries. Small and mid caps can therefore be of interest to many investors – either to balance an overweighting in blue chips or to benefit from the development of selected small and medium-sized companies in a targeted manner.