Defined: Small Cap, Mid Cap and Blue Chip

In the financial media, you'll often hear the words, 'small cap', 'mid cap' and 'blue chip', so it's important to understand what they mean.

Firstly, what do we mean by 'cap'?

'Cap' is short for market capitalisation, which is a measure of the size of a company. It is simply the number of shares a company has issued, multiplied by their price. For example, a company with 100 shares at a market price of $1,000 would have a market cap of $100,000.

Small Cap Defined

Small caps are companies which (yep, you guessed it) have a smaller market capitalisation. What makes a small cap varies from market to market, and depending on who you ask.

For example, in the United States, a small cap company might have a market cap of anywhere between $500 million and $2 billion. In Australia, a much smaller financial market, that number may stretch from $200 million to $500 million.

Mid Cap Defined

A 'mid cap' company might be a company with a market cap anywhere between $500 million and $2 billion in Australia. However, there are no hard and fast rules.

Blue Chip

Blue chips are those companies with a large market capitalisation. While there are no hard and fast rules of what makes a 'blue chip', a typical blue chip company may have the following features:

  • A market-leading position
  • A strong consumer brand
  • Inclusion in a leading market index, such as Australia's ASX 200 or the USA's Dow Jones
  • A national or international presence

The phrase 'blue chip' comes from the game of poker, in which the 'blue chips' were the most valuable a player could hold. 

Test Your Knowledge

Michael says to Jackson, "Beat It Company Ltd" is a blue chip stock. What does 'blue chip' mean (choose the most correct answer)?

You are right! There are no hard and fast rules, but a large company with a leading market position, strong brand, international presence and participation in a leading market index.

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