The Differences Between Large, Mid, & Small Cap Shares

If you follow the financial news, you’ve probably seen the ASX 100 scrolling across the screen.

But what is that list, exactly?

The stocks that make up the Australian share market fall into three main categories: large, mid, and small. This is based on each company’s size or “market capitalisation,” which is its current share price multiplied by the number of outstanding shares.

So, in short, the ASX 100 is made up of the biggest 100 companies in the country — and it can help you figure out what stocks to buy.

Okay, now let’s break down each type of share.   

What are large cap shares?

Large cap stocks are the biggest companies on the ASX when it comes to market cap. Also known as big cap stocks, they’re worth anywhere from $10 billion to $100 billion or more.

They dominate the S&P/ASX 50, which is made up of the 50 largest companies in the country and represents half of the Australian share market. You’ll recognise a lot of household names in the best performing large cap shares on the ASX, such as the Commonwealth Bank, BHP and Telstra.

And in the US market, the most famous large cap shares are the “FAANG” stocks (Facebook, Apple, Amazon, Netflix and Alphabet — Google’s parent company). That gives you an idea of just how huge these companies are.

As the largest publicly traded companies, large cap shares usually lead their industry and operate in Australia and overseas — which is great news for investors!

Benefits of large cap shares

When you buy large cap shares, you’re buying a slice of a highly successful business.

These are the major characteristics of large cap shares:

  • They’re stable and transparent. With a proven track record of consistent revenue and earnings, you can typically count on these companies to make you money over time and weather economic downturns. In other words, they’re less volatile. Plus, they’re typically “blue chip” companies, so it’s easy for investors to find information about their operations and profits. Analysts tend to cover these companies the most, too.
  • They often pay dividends. Since they’re so well-established, most of these companies can commit to paying dividends to their shareholders. If you’re hoping for a steady stream of income, large cap shares with a low share price are often worth considering.
  • They tend to be movers and shakers. These companies create innovative products and services, and any news about them can sway the overall market, which is a powerful position to be in.

Downsides of large cap shares

All shares have their limitations. With large cap shares, you may not see the triple-digit returns of some small cap shares, but that’s because they’ve already gone through a massive growth phase. Because of that, they may lag behind many smaller stocks during a bull market.

Who they’re best for?

All investors! Thanks to their size and stability, large cap shares are generally the safest equity investments. While they don’t have the same growth potential as smaller stocks, they offer the prospect of higher share prices plus a steady flow of dividends.

What are mid cap shares?

These are the bottom 50 companies in the ASX 100 in terms of market cap. They’ve outgrown the small cap space, but they’re not quite big enough for large cap indexes like the ASX 50.

Mid cap stocks are medium-sized companies worth between $1 and $10 billion. They’re established in their industries, but they potentially still have a lot of growing to do. You’ll spot familiar names in the top mid cap shares, like Afterpay, SEEK and Dominos, as well as companies you’ve probably never heard of, such as Worley and Alumnia.

That’s the beauty of mid cap shares: they’re diverse. The large cap market is packed with banks and big mining companies, but you’ll find a mix of tech, healthcare, and retail companies in the mid cap sector. 

Benefits of mid cap shares

Think of mid cap shares as the sweet spot of the Australian share market. These companies have the go-for-it spirit of smaller companies and start-ups, but they already have some serious runs on the board. They have a foothold in their industries that should continue to grow.

These are the main characteristics of mid cap shares:

  • There’s room for growth. We sound like a broken record at this point, but it’s true. Since they’re still growing, mid cap shares tend to have higher revenue and net income growth than large cap shares. They’re carving out their market share, so you can invest before they potentially “graduate” to the large cap market.
  • They’re agile. Thanks to their size, mid cap companies can more easily pivot and respond to growth opportunities. You’ll see lots of mergers and acquisitions in this space (like the TPG/Vodafone merger), as well as companies that focus on a niche market, like A2 Milk with plant-based milk.
  • They boost exposure to a wider range of industries. Investing in a range of mid cap shares is an easy way to diversify your portfolio.

Downsides of mid cap shares

Because mid cap companies are in the middle of their growth curve, they tend to reinvest more money back into their businesses. This means that dividends may be lower.

And of course, share price may already display considerable growth. Buying at the mid cap stage isn’t getting in on the ground floor.

Who they’re best for?

Investors who want to balance out their portfolio. Mid cap companies are generally riskier than large cap companies, but less risky than small cap companies, so they offer a good mix of growth and stability.

What are small cap shares?

Last but not least, small cap shares are the companies that sit outside of the largest 100 on the ASX. Also known as low cap shares, they’re part of the S&P/ASX Small Ordinaries Index (XSO) and usually have a market cap of a few hundred million dollars to $1 billion.

A billion dollars isn’t “small” by any means, but it’s the dividing line in the weird and wonderful world of market capitalisation. In other words, these are companies with serious potential!

They are often younger companies that focus on serving the Australian market, so you might know some of the companies on the list, like Blackmores, Breville and Nick Scali . A lot of them are regional or highly specialised, so you can expect to spot some new names, too.

Some of the lesser known names that Motion Trader’s algorithms have identified include: Polynovo, Opthea, Big Un, Jumbo Interactive, Alliance Aviation, Avita Therapeutics, PPK Group, Advanced NanoTek, and Pinnacle Investment Management.

[Please note: These are not current recommendations. Motion Trader’s algorithms identified a significant growth phase in these stocks, and may have since recommended an exit.]

Benefits of small cap shares

Small cap companies are often growth stocks. They could be making big moves in their industries, and it’s exciting to watch them grow (and aggressively so).

These are the key characteristics to look out for:

  • They have high growth rates. These companies can grow in leaps and bounds. To put this into context, they often have a better chance of doubling their sales of $500,000 than a large cap company has of doing the same with $50 million.
  • They can adapt to changing market conditions. Think of small cap companies as small boats. The best low cap shares can change course to respond to shifts in the market quicker than a huge cruise ship. That’s because they’re smaller in size, with less hierarchical management and red tape.
  • They’re not impacted by other economies as much. Since many of these companies have a local focus , they earn most of their money domestically. This means they may be less affected by the rise and fall of other currencies, like the US dollar.
  • They’re often undervalued. Most market research and analysis focuses on large cap companies. This means small cap companies may fly under the radar, making them an excellent hunting ground for investors looking for high potential stocks.

This short video will explain a process for identifying when to buy a potentially undervalued stock;

Downsides of small cap shares

These small companies are often still developing their business, so they come with higher risk to match their potential for higher returns. Their future may be less certain, and they may be dealing with a lack of quality staff or resources.

Like mid cap shares, they may reinvest a large portion of profits to fuel growth. And small cap shares often have less liquidity. This means can make it harder to buy and sell them quickly at the price that you want.

Who they’re best for?

Investors with a higher risk tolerance. Small cap stocks can outperform large and mid caps in terms of returns, but they are often more volatile.
For that reason, small caps will often have a lower weighting in many investor’s portfolios.

But with a good selection method and appropriate risk management, small caps could add considerable benefits to a portfolio.

Balance your portfolio with diverse investments

Motion Trader identifies opportunities from across the ASX. This could help you select a mix of large, mid and small cap shares to match your risk profile and investment horizon. Along with diversifying your portfolio, this strategy could help you spread risk while benefiting from areas of growth.

Once you know what kind of shares you’re looking for, you could use Motion Trader to uncover high potential stocks. We scan practically every ASX stock (minus EFTs and LICs) and use algorithms to detect trends in share prices. With this information on your side, you could invest in some of the best ASX shares to buy now before the market catches on.

If you’re ready to build a balanced portfolio, contact our team today. And if you want to learn how to buy and sell shares in the meantime, register for our free video training.

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Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.