Market Capitalization Score

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Market Cap Scores are based on the exchanges that the security trades in. YCharts currently covers exchanges for two countries, US and Canada. All stocks in US Exchanges are scored separately from all stocks in Canadian exchanges.

The YCharts Market Cap Score reflects the phenomenon where “smaller firms have had higher adjusted returns, on average, than larger firms”. This behavior is known by a multitude of names: “small-firm effect”, “neglected firm effect”, “small-cap premium” or “size effect”. For the purpose of this article, we will refer this phenomenon as the ‘size effect’.

The ‘size effect’ was originally proposed by Rolf Banz in his paper The Relationship Between Return and Market Value of Common Stocks. A summary of his paper is as follows:

  • Companies with smaller total market values will have higher risk adjusted returns.
  • This ‘size effect’ has been in existence for at least 40 years prior to Banz’s publication.
  • The ‘size effect’ is most pronounced for very small firms and large firms. There is little difference in returns between mid and large firms.

The exact reasons for the ‘size effect’ remain unknown, however there are a few convincing theories:

  1. “Size may be a proxy for unknown true additional factors correlated with market value.” (R. W. Banz, Return and Firm Size)
  2. Small capitalization firms possess traits that make unavailable for certain investor groups.
    • Most small cap stocks do not pay dividends, which eliminate them from income investors.
    • Vis-à-vis to high cap stocks, small cap stocks have higher price volatility, which can eliminate them from risk sensitive portfolios (ie. pension portfolios)
    • Purchases in small cap stocks have a higher negative liquidity impact. Because most trading in developed markets (United States(~60-70%), Europe and Japan) are done by institutional accounts, managers of these accounts avoid small-cap stocks due to unfavorable price impacts when purchasing and selling large blocks. Local regulation can also prevent institutions owning more than a % of a company. For instance, retirement accounts in the US are prevented from owning more than 5% of a company.
    • Institutional accounts suffer from agency-risk. Portfolio managers do not want to look like fools holding a stock that isn’t commonly known by popular media. It’s easier to say (and keep your job), when you are long Apple and Google, rather than a company operating in high profit-margin niche environment when the market moves against you.
    • Low cap stocks have little research coverage. Investors prefer investing in stocks where they can easily find research on and shy from diving into a company’s financials.

The historical evidence for the ‘small firm effect’ remains pronounced. With the exception of the late 1990s, smaller capitalization firms have outperformed large capitalization stocks.

With the above in mind: YCharts has created the Market Capitalization Score for your use. This score breaks down all the companies that YCharts covers into ten fractiles. Each score (from 1-10) represents the % a company’s market capitalization score ranks in (higher being better). *

A company with a score of 10 represents the bottom 10% of capitalization companies, whereas a company with a score of 1 represents the largest 10% of companies.

For saved screens of companies that have a high market cap score (6-10), please click here.

Other Fractile Scores

YCharts offers other fractile scoring algorithms. Please see

Market Momentum Score

Value Score

Fundamentals Score

Y-Rating

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