Investing professionals use the terms large-cap stock and small-cap stock to refer to larger and smaller companies. The “cap” in both terms refers to market capitalization, or the total market value of a firm’s shares.

Market capitalization is calculated by multiplying the number of a firm’s shares by the price of the shares. When comparing small-cap and large-cap stocks, it’s important to understand that they differ on more than just size or market cap — they also offer different levels of risks and returns.

What are small-cap stocks?

Small-cap stocks are generally considered to be shares of companies with a market capitalization between $300 million and $2 billion. Strict definitions aside, some people stretch that range to include companies with larger market capitalizations.

“Some will say, ‘We consider anything up to $5 billion to be a small cap,’” said Kashif Ahmed, a certified financial planner in Bedford, Mass. “But most people will tell you it’s generally $2 billion or less.”

Many small-cap stocks are penny stocks, meaning their shares are priced under $5. These smaller companies ostensibly have more room to grow, giving shareholders the opportunity to realize substantial gains on these investments. Conversely, they can lose value very quickly, and small-cap stock volatility reflects this dichotomy. As a result, small-cap penny stocks are considered highly risky investments.

When he’s trying to explain small-cap stocks to a client, certified financial planner Michael Yoder will often show them a list of the top 25 holdings in a small-cap index and ask them how many names they recognize. “The two that get recognized the most are DocuSign and Fair Isaac,” said Yoder, who works in Walnut Creek, Calif.

Small-cap stocks are more volatile

Since small-cap stocks are shares of smaller companies, their stock prices tend to swing more widely. The Russell 2000 — an index that tracks 2,000 small-cap stocks — has proven to be significantly more volatile than the S&P 500, which tracks 500 large-cap companies.

“Over the last 10 years, small caps have been 42% riskier,” Yoder said. “To be specific, ETFs that track the Russell 2000 index have been 42% more volatile over the past 10 years than ETFs that track the S&P 500.”

Although small caps are a chancier venture, there’s also the potential for great performance. Small caps have historically outperformed large-cap stocks. There’s greater room for growth and opportunities to get in on the ground floor, so to speak, at a company that soars in later years.

And not all small-cap companies are startup companies taking risky bets. A small-cap company could just as easily be a company that makes light bulbs. “And everybody needs to buy light bulbs,” Ahmed said.

Small-cap stock features

• Market capitalization of $300 million to $2 billion
• Stocks are more volatile
• Outperform large-cap stocks over the long term
• Tend toward more aggressive growth strategies
• Smaller percentage of them pay dividends

What are large-cap stocks?

Most people define large-cap stocks as shares of companies with a market capitalization of $10 billion or more. Large-cap stocks are shares of companies you’ve probably heard of: Apple, Exxon, Google and Coca-Cola are all large-cap companies.

Are large-cap stocks high-risk? Not generally. These companies tend to be established and well-known, although they’re not all decades-old behemoths. “Tesla is a relatively new company, but it has a gigantic market capitalization,” Ahmed said. “Whereas Ford and General Motors and Chrysler have been around forever, and their market cap combined is less than Tesla’s.”

Large-cap stocks: Less volatility, lower growth potential

Although they’re less volatile, large-cap companies are typically slower-growing. Consider that of the biggest companies at the beginning of 2000, only three out of 10 have grown, seven of the 10 are smaller and only Microsoft is still in the top 10.

“People see these big companies as unsinkable ships,” Yoder said. “Twenty years ago, people would’ve said, ‘What could possibly happen to General Electric?’ Now it’s a quarter of the size it was two decades ago.”

So while you may think that putting all your money in today’s large-cap companies is a solid investing strategy, it could backfire. “Trees don’t grow to the sky,” Yoder said. “The reason small caps sometimes outperform is they simply have more room to grow.”

Large-cap stocks pay dividends

There is one thing large-cap companies have over small-cap companies: payment of dividends. While fewer than four in 10 small-cap companies pay dividends, large-cap companies are often established enough to pay dividends out of revenues.

“Large companies that pay dividends tend to do better and are less volatile in times that there’s a lot of volatility because of geopolitical things that may be happening,” said Ron Palastro, a certified financial planner in Brooklyn, N.Y. “That would be another thing to take into consideration.”

Large-cap stock features

• Market capitalization of $10 billion or more
• Tend to be established, well-known companies
• Stocks are less volatile
• Growth tends to be slower overall
• More likely to pay dividends than small-cap stocks

Large-cap vs. small-cap stocks: What’s the difference?

The primary difference between large-cap and small-cap stocks is size: Large-cap stocks are shares of companies with a large market capitalization, and small-cap stocks are shares of companies with a small market capitalization. Note that there are also mid-cap stocks with a market capitalization in the middle.

But there are also differences when it comes to company growth, volatility and other factors. Here’s how it breaks down:

Small-cap vs. large-cap: Historical stock performance

In general, small-cap stocks are considered riskier and large-cap stocks are considered safer investments. But their performances over time depend on when you’re measuring. Over the long haul, for instance, small caps have historically produced greater returns. Since the stock market’s inception, small stocks have beaten large stocks by 4% annually, on average.

As mentioned, small-cap performance can be volatile in the short term. In the year ending December 2018, a small-cap portfolio would have lost more than 11%, compared to a large-cap portfolio’s 4.76% loss. Over the previous 20 years, however, small-cap versus large-cap returned 8.91% versus 5.97%, respectively. And since 1926, a small-cap portfolio would have returned 11.65% to a large-cap portfolio’s 9.83%.

That doesn’t mean large-cap stocks can’t deliver. “Over the last 10 years, large-cap stocks have rather significantly outperformed small caps, by a pretty wide margin,” Yoder said. “And from 1984 to 1999, large caps beat small caps by an average of 5% a year.”

Here’s how the Russell 2000 and the S&P 500 have compared since 1979:

Large-cap vs. small-cap stocks: How much risk do you want?

Investing in large-cap versus small-cap stocks depends somewhat on your appetite for risk and your time horizon. Small-cap stocks are a riskier investment, but if you’ve got decades until retirement, you’ve got time to weather some market swings.

“Someone who’s 25 can potentially take on more risk because if they lose more money, they have time to recover from that,” Ahmed said. “But at the same time, not every 25-year-old is wired the same. I have 25-year-olds who are very risk-averse.”

To invest aggressively in small-cap stocks, you must be comfortable with market swings, and you probably don’t want to put a large chunk of your portfolio at risk. “No matter how risky people think they are, they’re actually not,” Ahmed said. “The first time they see parentheses on their statement, they all change their religion very quickly.”

How much of my portfolio should be small-cap?

Planners suggest putting about 5% to 15% of your portfolio toward small-cap stocks. “You need exposure, but you need a little exposure,” Palastro said. “Maybe it’s 5% or 10%, but it’s not 50%. That’s how I try to explain it.”

On the other hand, leaning too heavily on large-cap stocks can also put you in a precarious position. “Most people consider large caps to be safer, which is often true,” Yoder said. “But in the last two recessions, small caps actually held up better than large caps.”

In other words, people with a portfolio full of mostly large-cap stocks lost more money than those with some small caps mixed in, even though it’s the riskier choice.

“Modern portfolio theory says that even if you add a risky asset to an overall portfolio, as long as it doesn’t move in lockstep with everything else in your portfolio, it can decrease overall risk,” Yoder said. “Even our retired clients still have a percentage of their U.S. portfolio invested in small-cap stocks.”

In the end, it’s crucial to have a mix of both small-cap and large-cap in your portfolio — along with a diverse mix of other investments. For best results, experts recommend a foundation of large-cap stocks (perhaps 30% to 40%) along with a mix of small- and mid-cap stocks, international stocks and some bonds.

Asset management and wealth management may seem like interchangeable terms, but they are quite different in practice. Asset management is when you hire someone to direct your investments, while wealth management is advice that addresses every aspect of your financial life, from cash flow to goal planning to insurance coverage. Whether you need one or the other will depend on your situation and stage in life.

What is asset management?

Asset management is the practice of advising and managing investments. If you hire a financial professional to manage your assets, that’s their only focus: the performance of your portfolio, evaluation of your risk and the allocation of assets in investments.

“Ultimately, it’s understanding a client’s goals and developing, implementing and managing a set asset allocation to help a client reach those goals,” said Trevor Scotto, a financial planner in Walnut Creek, Calif.

An asset manager can help you design your portfolio, monitor it over time and distribute the assets as needed. “When someone needs to start distributing assets from their portfolio, an asset manager will help them structure the most intelligent and tax-efficient process,” said Alex Caswell, a financial planner in San Francisco.

What services does asset management offer?

Typically, an asset manager will offer the following:

• Risk assessment
• Portfolio design
• Investment rebalancing
• Tax minimization strategies
• Monitoring of investments and investment options
• Asset distribution

What sort of clients does an asset manager serve?

A typical client for an asset manager might be someone just starting out in their career who needs guidance on setting up their portfolio, or someone with a simpler financial situation in general. They might not have the wealth or complicated money scenario that lends itself to more involved wealth planning.

“On the other side of the spectrum is more of a do-it-yourselfer,” Scotto said. This kind of client might want to manage the rest of their financial lives themselves, along with a bit of investment guidance.

What is wealth management?

Wealth management takes a big-picture view of your finances, from estate planning to insurance coverage. Wealth management includes asset management — but instead of just focusing on your investment portfolio, a wealth manager will take all the other facets of your financial life into account.

The benefit of wealth management, among other things, is that wealth managers consider and advise on other parts of your finances, and those parts can be just as crucial as your investments.

“When clients come in and they’ve really had their financial dreams broken, it usually wasn’t because they messed up on investments,” said Robert DeHollander, a financial planner in Greenville, S.C. “It was usually because they missed something on the financial defense side, especially insurance.”

A wealth manager may also help coordinate planning with all the financial professionals in your life, such as your accountant, insurance agent and estate attorney. “Most of the time, what we find is that none of those advisors are actually talking to each other, and things can get missed,” Scotto said. “There’s so much more value the client can have if all the advisors are aligned.”

What services does wealth management offer?

Wealth management will differ from firm to firm, but in general, you can expect to find many of the following on a wealth manager’s list:

• Analysis of cash flow and debt management
• Tax planning
• Retirement planning and goal setting
• Social Security analysis
• Estate planning
• Legacy planning
• Insurance analysis (life, health, property, disability, long-term care)
• Investment management
• Coordination of all your advisors (CPA, estate attorney, etc.)

What sort of clients does a wealth manager serve?

Wealth management clients are typically further along in their financial affairs — whether that’s higher on the career ladder or with a higher net worth. They also may be people with more complex financial situations, such as business owners, people approaching retirement or those in the midst of a life event that has money in motion.

“That might be a birth, a death or an inheritance,” DeHollander said. “They need a professional to look over their shoulder and give them advice.”

Wealth management can also be helpful for someone coming out of a divorce or having just lost a spouse. “It’s a very emotional time, and you need somebody to be your advocate to help put everything in place,” Scotto said.

The common thread for wealth management clients is that they’ve realized there’s more to their financial security than their investment portfolio. “Investing assets is a necessary part of creating financial security, but by far, it’s not the sole driver,” said Erika Safran, a financial planner in New York City.

Differences between asset and wealth management

In thinking about asset management vs wealth management, it’s useful to imagine that asset management is one piece of the wealth management pie. While wealth management includes asset management, it also includes guidance on your overall financial picture, from whether you have the right amount of life insurance to whether you have the right powers of attorney drawn up.

In general, either kind of manager can be registered as a broker/dealer or as an investment advisor, and either kind of manager may carry fiduciary responsibility, or they may only need to offer recommendations that are “suitable” for your portfolio.

Another difference tends to be in fee structure: Asset managers commonly charge a percentage of assets to manage your investments, or they’re paid on commission by the products they recommend. Some may also offer an hourly rate.

Wealth managers may charge a percentage of assets, but there may be an additional fee — a flat rate or hourly rate — for the evaluation of your financial picture and for recommendations. This may be a fee that’s charged once, or annually, or every time you have them revisit your situation.

The tricky part about differentiating asset management from wealth management is that a lot of firms use wealth management language to describe their asset management functions. Many “wealth managers” are really just asset managers.

“My experience has typically been that you can’t put a blanket statement on these terminologies,” Scotto said. “I’ve seen people who work at banks who call themselves wealth managers. It’s very confusing to the end investor.”

Which is right for you?

The decision to go for asset management versus wealth management is a personal one and depends on your goals and circumstances. If you’re a newer investor and just looking for a kickstart to get your portfolio going, an asset manager may be the right call. If you’re looking for more overall guidance or you have a more complex money situation, a wealth manager can help.

How to choose a wealth manager

It’s important to put some time and research into choosing a wealth manager because that person will be advising you on every aspect of your financial life. “At the end of the day, you need to feel really comfortable with the person you’re working with because ultimately, one of the roles of the advisor is keeping the client from making costly mistakes,” Scotto said. “You have to have so much trust in your advisor.”

To that end, ask friends and co-workers if they’ve worked with an advisor they recommend. “The best way to do it is through a referral, if you know someone you trust who’s had an experience and can give you the name of somebody,” DeHollander said. Talk to at least three advisors before committing. Ask a lot of questions, and make sure it’s a good fit.

Some questions to ask:

• How do you define wealth management?
• Who are your typical clients?
• How are you compensated?
• Is any of your compensation based on selling products?
• What is your money philosophy?
• What licenses do you hold?
• What financial planning designations or certifications do you hold?
• What are your areas of specialization?
• Will I work with you, or someone else in your company?
• What kind of services can I expect?
• Are you required to act as a fiduciary?

(This last question is important. As a fiduciary, an advisor is required to put a client’s interests above their own.)

How to choose an asset manager

The process of choosing an asset manager is a lot like choosing a wealth manager, except your range of focus is narrower. As with a wealth manager, it’s still recommended that you speak to at least three advisors before choosing one, and references are a great place to start. You can ask the same questions of asset managers as you would of wealth managers. (But ask them how they’d define asset management.)

Do RIAs offer asset management services or wealth management?

Registered investment advisors (RIAs) may offer both asset management services and wealth management services. It’s important to talk to them about the services they offer so that you understand the scope of their work.

“It’s a case by case basis, firm by firm, advisor by advisor,” Scotto said. “The one thing to point out is that RIAs, as independent firms, are required to uphold fiduciary standards, and if you’re a Certified Financial Professional (CFP), you’re also supposed to uphold the fiduciary standard of care. If there’s any doubt, find an independent investment advisory firm with CFPs on staff, and you’ll be in good shape.”