BetterInvesting recommends considering the 'size' of the company when reviewing portfolio diversification. To facilitate that diversification, BetterInvesting has established the following rough guidelines for categorizing by size based upon the company's recent revenue (either last fiscal year or trailing twelve months):
Small company - less than $1 billion in revenue
Medium company - $1 billion to $10 billion
Large company - more than $10 billion
These company size classifications are used throughout the BetterInvesting Online Stock Tools.
Why do we determine the 'size' of the company based on annual revenue rather than market capitalization?
The Stock Selection Guide is a tool that is focused on analyzing the fundamentals of an organization. One of the primary drivers of good fundamentals is revenue growth. Small companies with revenues less than $1B annually may be able to achieve more rapid rates of growth, although this often comes with a more price volatility and higher investment risk. Large companies with revenues greater than $10B annually, often have slower, but more predictable rates of growth and tend to be more resistant to price declines during weak periods in the stock market. In other words, we look at diversification by size mainly as a means to help us maintain adequate growth for our portfolio, while keeping our risk at an acceptable level. For that reason we have decided that the best way of determining the size of an organization is to base it on annual revenues. The market cap of an organization is based on its market price, and fluctuations can be caused by factors that are unrelated to the fundamentals of the organization.
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