Trading On Line - Market Capitalization

Market capitalization is defined as the total dollar value of a stock’s outstanding
shares and is computed by multiplying the number of outstanding
shares by the current market price. Thus, market capitalization is a
measure of corporate size. With approximately 8,500 stocks available to
trade on U.S. stock exchanges, many traders judge a company by its size,
which can be a determinant in price and risk. In fact, there are four unoffi-
cial size classifications for U.S. stocks: blue chips, mid-caps, small caps,
and micro-caps.
1. Blue-chip stocks. Blue chip is a term derived from poker, where blue
chips in a card game hold the most value. Hence, blue-chip stocks are
those stocks that have the most market capitalization in the marketplace
(more than $5 billion). Typically they enjoy solid value and good
security, with a record of continuous dividend payments and other desirable
investment attributes.
2. Mid-cap stocks. Mid-caps usually have a bigger growth potential than
blue-chip stocks but they are not as heavily capitalized ($500 million
to $5 billion).
3. Small-cap stocks. Small caps can be potentially difficult to trade because
they do not have the benefit of high liquidity (valued at $150
million to $500 million). However, these stocks, although quite risky,
are usually relatively inexpensive and big gains are possible.
4. Micro-cap stocks. Micro-caps, also known as penny stocks, are stocks
priced at less than $2 per share with a market capitalization of less
than $150 million.
Some traders like to trade riskier stocks because they have the potential
for big price moves; others prefer the longer-term stability of blue-chip
stocks. In general, deciding which stocks to trade depends on your time
availability, stress threshold, and account size.

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