Market capitalization is simply the market value of a specific company. To arrive at a company's market cap, simply multiply the stock price by the number of outstanding shares. There are three main types of market caps: small, mid, and large. There are micro-caps and mega-caps as well, but they are simply a subset of the small and large cap categories.

Small caps are those who have a market cap of less than one billion dollars. Large caps have a market cap of five billion or more. Mega-caps, like General Electric, will have market caps as high as several hundred billion dollars. Mid caps will fall somewhere between large and small cap stocks. Many mutual funds, and individual investors, will focus on solely on a specific market cap when investing.

Small Cap Stocks Have a High Potential for Growth

Historically, small cap stocks have outperformed their large cap brethren. Small caps' ability to outperform large cap stocks is due to several factors. A company's earnings are the main influence behind any long term advance. Smaller companies will likely have higher earnings growth rates than large companies, hence a larger price appreciation in the stock price.

Small cap stocks typically will have less outstanding shares than a large cap. Exxon Mobile (XOM) is a mega-cap with over six billion shares outstanding. On the flip side, World Acceptance Corp. (WRLD) has just over 18 million shares outstanding. A smaller float, or shares available for purchase on the market, combined with faster earnings growth can lead to faster price appreciation in the stock's price.