Small cap or large cap is short for market capitalization, also known as market value. This is calculated by multiplying a company’s number of shares outstanding by its current stock price.

The investing world often categorizes companies by their market cap because companies of different size sometimes move in different cycles. When large cap stocks are doing well, small caps might be lagging and vice versa.

Some institutional investors or mutual funds invest mainly in large-cap stocks, perhaps because they have too many assets to invest in small companies without affecting their share price. Some investors and funds specialize in small-cap stocks, perhaps because they are not as widely follows as large-cap stocks and present more pricing opportunities.

Many stock indexes track stocks by size. The Standard & Poor’s 500 is an index of 500 large-cap stocks. The Russell 2000 is an index of 2,000 small-cap stocks.

There is no cutoff that separates large and small cap. Stocks that fall inbetween are called mid-caps.