Many people think that having the name of a large company in your portfolio is a better option than small companies, which pose a greater risk. This is not always true as the balance is the correct answer.
Investors make of great mistake by not completely understanding the true meaning of the difference that large companies have over smaller ones. This difference should be appreciated, and one should be aware of company sizes. Just being aware of the different sectors and industries is not enough. One should also be aware of the fact that the organizational structures that most large companies have shall have some resemblance to smaller companies dealing with the same things. Of course, the scale of production, as well as an investment, will be different what the organizational structure, if you look at it from a bird's eye view, shall be quite similar. One should be thus aware of the differences that size brings tour company cannot be replicated by small companies as a human resource as an investment as it's own benefits.
Similarly, you will find that smaller companies are more alike to one another. These companies will have similar growth potential, organizational structure, as well as modes of operation. The small companies have the potential to reach New heights faster but can also have a steep decline in its growth. The small businesses many a time rely on exchange in the market and hope to climb the ladder to new heights by adapting to the change business situation. Things can go south as well if the company is unable to adapt itself to the changes. One shall notice a similar pattern at the stock markets at the level of the price movements. Generally, one shall find that a mid-cap company will have a low trading volume in most cases, along with a smaller number of traders who will be interested in it. These traders can be big as well as small, but what this entails is that any new information, positive or negative, has the power to tip the scale by a significant amount and affect the stock prices of these mid-cap companies. Large companies do not witness this sharp change.
This means that less amount of time is allocated to do research on the stocks of these types of companies. The good news can also have no huge impact on the stock price as well due to a lack of awareness as well as reluctance to research a less powerful company. If one is investing in small-cap or mid-cap companies, then it boils down to higher potential games as well as losses. This means that one has to put in much faith, and investment can be quite a risky venture. The other factor that is explained here is the fact that large companies tend to be more alike than smaller companies. Smaller companies have a much greater variance in their workings.
So the important question here is how does one approach market capitalization as an investor? Even if one has figured out the portion of one's equity portfolio that will be invested in different companies of different sizes depending upon one's choice, there still remains the issue of maintaining a proper balance. It should never be ignored that an imbalance in capitalization can be quite problematic. Make sure some of your funds are mid-cap or multi-cap. Do not mess up the equilibrium. Keep in mind that similar market conditions can change the scale towards smaller companies, and before you can do anything, you will put your entire portfolio towards less secure companies that must be avoided at all costs. Be proactive and make smart choices to stay at the top of your game always.