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What Are Market Cap Mutual Funds?

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Question: What Are Market Cap Mutual Funds?
Many investors glaze over when they begin to hear terms such as market cap. But these two words "market cap" are important when it comes to investing in mutual funds. So, what is market cap and what are market cap mutual funds?
Answer:

Market cap is the price of a share of stock multiplied by the number of shares outstanding. Many equity mutual funds are categorized based on the average market cap of the stocks that they own.

Market Cap of a Stock

Market Cap Example:

  • Shares of XYZ stock trade at $2 per share.
  • There are 100 million shares outstanding of XYZ stock.
  • The market capitalization of XYZ stock is market price of $2 per share multiplied by the 100 million shares outstanding ($2 multiplied by 100 million) which equals a $200 million market cap.

Market Cap Mutual Funds

Various third-party research firms (such as Morningstar and Lipper), index providers (such as S&P and MSCI), and even mutual fund companies themselves (such as Vanguard and Fidelity) place mutual funds in categories based on the average of the market cap of the stocks that each mutual fund owns.

Popular market cap fund categories are:

  • Large Cap
  • Mid Cap
  • Small Cap
  • Micro Cap

Final Word on Market Cap Funds

Mutual fund investors are well served in buying various market cap funds. Rather than concentrating the majority of assets within one market cap, learn about the benefits of diversification.

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