What do Apple, Gilead Sciences, and Tesla have in common? At first glance you might think, "Not much." Their businesses are very different. The companies' sizes, while they're all big, also vary significantly.
But there's at least one thing that Apple, Gilead, and Tesla have in common. They all used to be small-cap stocks. Most of the well-known stocks on the market today were small-cap stocks at some point. But exactly how many small-cap stocks are there? The number of small-cap companies fluctuates quite a bit. However, you might be surprised by how many small-cap stocks there are.
Total number of small-cap stocks (for now)
The Russell 2000 Index is the most widely known small-cap stock market index. So are there 2,000 small-cap stocks? Not necessarily. The Russell 2000 includes the 2,000 smallest stocks in the broader Russell 3000 Index, but its holdings actually don't have to be small-cap stocks.
To determine the total number of small-cap stocks, we first have to know what a small-cap stock is. Investors define them in different ways, but small caps are most commonly defined as stocks with a market cap (the total value of shares held by all shareholders, including company insiders) between $300 million and $2 billion.
As of Sept. 21, 2020, there were 1,677 small-cap stocks using this definition. But by the time you read this, the number could already be different.
Why the number changes rapidly
There are several reasons the number of small-cap stocks changes rapidly:
1. The market caps of micro-cap stocks increase
Many stocks have smaller market caps than small-cap stocks do. Companies with market caps between $50 million and $300 million are called micro-cap stocks. When their market caps increase enough to top $300 million, they move into the small-cap category.
It often doesn't take a very big jump for micro-cap stocks to become small-cap stocks. For example, as of Sept. 21, 2020, there were more than 30 micro-cap stocks that would need only a 5% increase in share price to become small-cap stocks.
2. The market caps of mid-cap stocks decrease
The number of small-cap stocks can also grow when the market caps of larger stocks decline. Companies with market caps between $2 billion and $10 billion are known as mid-cap stocks. When the market caps of these companies fall below $2 billion, though, they slip into the small-cap category.
As you might expect, there can be several stocks on the bubble between mid cap and small cap at any given time. As a case in point, as of Sept. 21, 2020, more than 40 mid-cap stocks would only have to fall by 5% to become small-cap stocks.
3. Companies conduct initial public offerings (IPOs)
An initial public offering (IPO) is the process used by private companies to go public and sell their shares to outside investors. In many cases the market caps of these companies at their IPO qualifies them as small-cap stocks.
4. Small-cap companies are acquired or merge with other companies
Mergers and acquisitions are relatively common in the business world. When a small-cap company is bought out by or merges with another company, the number of small-cap stocks decreases.
5. Small-cap companies go private
Sometimes small-cap companies that are publicly traded opt to become privately held. This doesn't happen very often, but when it does, the number of small-cap stocks is reduced.
Why market cap matters
Is market cap really important? Does it matter if a stock is a small cap or not? Actually, yes. The following table shows annualized returns and standard deviations (a measure of volatility) for stocks between 1972 and 2019.
Small-cap stocks tend to handily outperform large-cap stocks over the long term. The trade-off, though, is that they're more volatile, as indicated by the higher standard deviation for small-cap stocks.
Stocks that can generate high annualized returns probably won't remain small caps forever. And one of them might even become the next Apple, Gilead Sciences, or Tesla.