One way to separate stocks is by comparing small caps to ASX 200 shares.
Let's examine the two and look at the pros and cons of both.
What are ASX 200 shares
In simple terms, "ASX 200" refers to the 200 largest companies listed on the Australian Stock Exchange measured by market capitalisation.
There are more than 2000 listed companies, so these top 200 are generally considered safer.
Some of the largest include household names like Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP) or Telstra Group Ltd (ASX: TLS).
Sometimes companies like these are referred to as "blue-chip" stocks, representing financial stability, long-term growth, and a strong track record.
Why invest in them?
Investors might turn to ASX 200 shares due to a proven track record of solid returns.
For example, 5 years ago, Commonwealth Bank shares were trading for around $60 each. Now they are trading at $166 a share.
While this growth isn't guaranteed for all of these stocks, this is likely the goal of ASX 200 investors. They aim for solid long term growth.
Secondly, these companies often pay dividends.
Companies pay dividends to shareholders from the profit they make, which can provide passive income, regardless of whether a share price is going up or down.
ASX 200 ETFs
Another option for investors looking to gain exposure to these ASX 200 stocks is to invest in an Exchange Traded Fund (ETF).
An ETF is a basket of shares that can be bought with one trade. This allows you to diversify your portfolio and invest in all ASX 200 stocks at once.
Research shows the S&P/ASX 200 index (ASX: XJO) has compounded at more than 9% per annum over the last 10 years, dividends included.
So while you won't get rich overnight, an ETF that tracks the ASX 200 could bring you solid long term growth.
ASX 200 tracking ETFs include:
Small cap stocks
A small cap stock typically ranks 101-300 in the S&P/ASX 300 Index (ASX: XKO) and has a market-cap ranging from a few hundred million to $2 billion.
These smaller companies generally aren't household names, but the upside can be higher than blue-chip companies.
In fact, many large-cap stocks started their professional lives as speculative small caps.
The case for small caps stocks is simple, getting a future blue-chip at an extremely low value.
A perfect example of this would be CSL Ltd (ASX: CSL).
In the early 2000s it had a market capitalisation of $100 million and a share price of around $6.00 in the early 2000s.
Today, it has a market cap of $113.86 billion and a share price of $240.79.
This kind of future growth is essentially impossible for a blue-chip company.
However, with greater potential upside comes greater risk, as some of these are yet to turn a profit or are still in relatively early stages of business.
In summary, small cap companies may have greater growth prospects than their larger peers, but they also tend to be more volatile than larger-cap stocks.
Small cap ETFs
While we all dream of getting in early on the next Meta (Facebook) or Amazon, correctly predicting the next small cap gem is tricky.
One option is to buy an ETF that gives exposure to multiple at once.
One such ETF is the VanEck MSCI International Small Cos Quality ETF (ASX: QSML).
It provides exposure to 150 of the world's highest-quality small companies.
Since its inception in 2021, it has risen 44%.
