Recognizing the relationship between company size, return potential, and risk is crucial. Typically, companies are categorized in one of three broad groups based on their size -- large-cap, midcap, and small-cap. Cap is short for market capitalization, which is the value of a company on the open market. Companies often grow and shrink in size with the passage of time, sometimes even moving from one market-cap category to another. Microsoft, today one of the world's largest companies, was once a small-cap company.
Generally, market capitalization corresponds to where a company may be in its business development. So a stock's market cap may have a direct bearing on its risk/reward potential. Over time, large-cap, midcap, and small-cap stocks have tended to take turns leading the market. Each can be affected differently by market or economic developments. That's why many investors diversify, maintaining a mix of market caps in their portfolios.