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3rd April 201 | Mateusz Groszek | Portfolio Fundamental Analyst

Blue Chip stocks vs. mid-caps and small caps?

Today we will go through the definition of blue chip, mid-caps, and small caps stocks. What are these companies? The true answer to this question could be impossible because there are many definitions. Every benchmark provider wrote something else about blue-chip, mid-caps and small caps stocks.

Furthermore, in every country, we have different companies that are considered a blue chip. What could truly define in what group the companies will fall? There is no one answer, as we stated previously, but in more cases, the benchmarks providers segregate companies according to market cap. 

Why it defines the stocks? Because the market cap could easily describe every company. In the exchange, the market cap is considered a good barometer of popularity and attractivity of companies.

Market capitalization – the main difference between blue chip, mid-cap and small-cap companies

First, we will look into the blue-chip stocks. They are popular to buy because they represent stable companies that often pay attractive dividends and have a long history. Usually, the blue-chip stocks are considered as high market-cap companies. 

For example, the United State market exchange is the biggest in the world. It means that the blue-chip companies will have very high market capitalization. Typically, a blue-chip stock is a component of the biggest indexes such as the S&P 500. 

If we will move to another continent, the blue-chip stock will mean something different. For example, companies that are included in the S&P Europe 350 index will be considered as blue-chip stocks. 

Furthermore, the companies from S&P Europe 350 have lower market capitalization then S&P 500 companies. If we wish to create from those two indexes one index that will include 500 companies with highest market cap level, we will have to segregate 850 companies according to market cap, then we will take the companies with the highest capitalization. 

Let's move to another index provider, MSCI. MSCI defines the large-cap index as consisting of the 300 largest companies in the investable market segment, the Mid Cap Index as comprising the next 450 companies, and the Small Cap Index as consisting of the remaining 1,750 companies.

As you see, the companies from the Mid Cap index could move to large-cap (blue chip equity) index or drop to small-cap index, it is not constant. 

If we look into the other benchmark provider, we will find a different technique to locate companies into those three groups. The Russell benchmark provider defines large-cap companies from the United States as the top 1 000 stocks from the Russell 3000 index. The Russell 3000 index measured the performance of the largest 3 000 U.S. companies representing approximately 98% of the investable U.S. equity market. 

Market capitalization – not enough

The market capitalization is not the only variable to consider. Morningstar prepared segregation of indexes by equity size and style scatter plot. The first criterion is market capitalization. The company differentiates three groups as others: small-cap, mid-cap, and large-cap companies. The style scatter plot segregation is an additional factor to create indexes. Those factors are value, blended and growth. 

Value is characterized by low fundamental rations and high dividends. The growth factor means high ratios and high correlation with domestic product growth. The blended is somewhere in the middle.

Summary

There is no one simple answer and definition of blue-chip, mid-cap and small-cap stocks. Everyone defines those groups differently. If you wish to know my opinion, I think that the blue-chip stock is those with highest market-cap level and with value factor. Next, there are large-cap stocks with growth or blended score between growth and value factor. 

The rest we could segregate in the term of market capitalization. The factors like value, growth and blended will define inside characteristics of companies that are included in the particular index.

Golden Sand Bank ("Bank") exercised due diligence to ensure that the information contained in this publication was not incorrect or untrue as at the date of publication.

All Investment products are at risk, as their value can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek financial advice. This publication is not an investment recommendation or investment advice in connection with any services provided by the Bank to the Client.

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