Where have you heard about size indices?

What are size indices?

They are stock indices which only include companies of a particular size, e.g. large-cap, mid-cap, or small-cap businesses for global or regional markets. They're built around the fact that many investors favour companies of a certain size.

You'll see examples of size indices mentioned in the financial media every day, with the S&P 500 and Russell 1000 among the major large-cap indices. The Russell 2000 is a major small-cap index.

What you need to know about size indices.

Indexes are meant to represent an entire stock market and follow the changes in the market over time. Market capitalisation is referred to as 'cap', and is calculated by multiplying the price of a stock by the number of shares outstanding. There are different sizes of 'cap': Big, mid and small, with the parameters for each developing over time to be approximations that can vary by broker house.

Big-cap stocks are shares of larger companies (like General Electric) and are also called blue chip stocks, mid-cap are medium-sized companies and small-cap stock are shares of smaller companies.

These indices are closely monitored and compared by advocates of 'size investing', a theory that suggests smaller-cap stocks tend to outperform larger-cap stocks. However, critics of this theory have indicated that investing is a cyclical business, and that there have been long passages of time when large-cap firms have actually outperformed their smaller counterparts.

American studies going back to the 1920s have suggested that investing in businesses with a smaller market capitalisation can provide people with higher returns than large-cap stocks. It's also been suggested that small-cap stocks may run into more price volatility than large-cap stocks.

Find out more about size indices.

For more information on stock investing, see stock index.