Market Caps and Your Portfolio: What You Need to Know

Below, we explain the differences between the different market caps, as well as offering some tips for incorporating the shares into your portfolio.

Large Cap
Large cap companies are the biggest companies in the world, dominating the market share. In general, large caps account for at least 70% of any domestic stock market.

In the UK, large cap companies are the ones listed on the FTSE 100, covering around 80% of the UK market. Companies in the FTSE 100 include:

• Associated British Foods, which owns food brands such as Twinings, Jordans, Ryvita, and Kingsmill.
• Telecoms companies such as BT and Vodafone
• Retailers Tesco, Sainsburys, and Next
• Oil companies BP and Royal Dutch Shell
• House builders such as Barratt and Persimmon
• Financial companies including NatWest, Barclays, HSBC, and Lloyds.

The companies are large and financially stable, and will often produce dividend income.

However, as the companies are already mature, there is little scope for growth.  

A potential risk of a large cap company is its sheer size. While they are not as vulnerable to wild fluctuations as smaller companies, major events can still swing the share price. If a large company drops in value or fails altogether, it can skew the whole index and have a knock-on effect across the market.

Mid Cap
Mid cap companies form the next tier of market capitalisation, and usually account for about 15% of the market. In the UK, the 250 companies comprising the mid cap market are listed on the FTSE 250 index. This is a significant jump from the FTSE 100, where the top 100 companies hold 70% of the market share.

Some of the household names in the mid cap sector include:

• Aston Martin
• Cineworld
• Currys
• Domino’s
• easyJet
• Greggs
• Marks & Spencer
• Wetherspoons

The FTSE 250 also includes a number of investment trusts. These are listed companies which are set up to invest in other companies. They may include some private equity and might even borrow to buy assets. Investment trusts serve a different purpose from direct company shares. They are more diversified, but you are investing in a fund manager’s stock-picking expertise rather than directly in a business.

Mid cap shares are generally more volatile and more sensitive to market events than large cap. However, they can offer higher growth potential while still investing in a well-known business.

Small Cap
Small cap refers to smaller companies, which collectively account for around 3% of the UK market. UK companies in this category are listed on the FTSE Small Cap index.

Many of the companies on this index are investment trusts, however it does include some well-known names such as:

• Card Factory
• DFS Furniture
• Halfords
• Stagecoach
• Ted Baker

Small cap companies can be much more volatile than larger or mid cap companies. They are also less likely to produce strong dividends as they often invest profits back into the business. However, smaller companies offer significant growth potential.

Collectively, the FTSE 100, FTSE 250, and FTSE Small Cap make up the FTSE All Share index, which represents the vast majority of the UK listed equity market.

Micro Cap
The smallest section of the market is held by micro cap companies. In the UK, this is represented by the FTSE Fledgling index.

Again, investment trusts are heavily represented on this index. A few familiar companies on the list are:

• Associated British Engineering
• McColl’s Retail Group
• The Works

Within the universe of listed plcs, this section of the market is likely to be considerably more volatile, but with high growth potential.

How to Decide What to Invest In
There are a number of ways in which you can incorporate different-sized companies into your portfolio. For example:

• By choosing the stocks yourself. Trading platforms make this an easy and low-cost option, but being your own investment manager can be extremely time-consuming.
• By investing in a range of tracker funds. Several investment companies offer low cost trackers which aim to replicate the holdings and performance of the main indices. This is a great way to capture market returns at a reasonable cost, without too much active involvement. Of course, a tracker will never perfectly replicate the index and you can normally expect the performance to lag behind slightly due to charges.
• By investing in actively managed funds. These may specialise in a particular sector of the market, or they could have a multi-asset strategy. This allows you to invest in a diverse range of assets which are selected by a fund manager. Active funds are generally more expensive than passive trackers, and do not always outperform them.
• By delegating the running of your portfolio to an investment manager, who will select funds and shares on your behalf. This offers the most bespoke approach, and it is, of course, the most expensive.

The best course of action will depend on the amount you wish to invest, your knowledge and experience, and the amount of active involvement you wish to have.

As well as selecting different-sized companies, you should also diversify your portfolio in terms of asset class, geographical region, and business sector. This helps to smooth out some of the volatility, as not all of your investments will behave in the same way at the same time.

The construction of your portfolio should also take into account how much risk you are prepared to take. If you need access to your money in a fairly short timeframe, or are nervous about market fluctuations, you should probably invest in less risky assets, such as cash, bonds, and a few mainstream equity funds.

A more adventurous investor with a long timeframe will probably want to maximise equity content, including smaller company shares, emerging market investments, and alternative assets.

Please do not hesitate to contact a member of the team if you would like to find out more about your investment options.