STOCK FUNDS are often grouped by the size of the companies they invest in -- big, small or tiny. By size we mean a company's value on the stock market: the number of shares it has outstanding multiplied by the share price. This is known as market capitalization, or cap size. Big companies tend to be less risky than small fries. But smaller companies can often offer more growth potential. The best idea is probably to have a mix of funds that give you exposure to large-cap, midsize and small companies. For more detail on how these different types of stocks behave, take a look at our Stocks department.

Large-Cap Funds
Large-capitalization funds generally invest in companies with market values of greater than $8 billion. Some, like the Vanguard 500 Index fund, merely mimic the index and invest in all 500 companies. Others, like Fidelity's huge Magellan fund, try to beat the index by picking a mix of large caps that will outperform the broader market.

As you can see from the applet at the right, large-cap funds are less volatile than funds that invest in smaller companies. Usually, that means you can expect smaller returns, but lately, large caps have outperformed all others. The last few years of the 1990s dished up an odd combination of economic stability in the U.S., but turmoil in Asia, Latin America and Russia. That made the stock market extremely volatile and convinced many investors to run for the relative stability of large, established companies like General Electric and Microsoft.

That may not always be the case, but for most investors, a large-cap fund is their core long-term holding, anyway. A good one is a reliable -- but far from stodgy -- place to park your retirement savings.

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Mid-Cap Funds
As the name implies, these funds fall in the middle. They aim to invest in companies with market values in the $1 billion to $8 billion range -- not large caps, but not quite small caps, either. The stocks in the lower end of their range are likely to exhibit the growth characteristics of smaller companies and therefore add some volatility to these funds. They make the most sense as a way to diversify your holdings.

Small-Cap Funds
A small-cap fund, like Turner Small Cap Equity, will focus on companies with a market value below $1 billion. The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Value funds aren't as risky as the hot growth funds, but they can still be volatile.

Because of their volatility, small-cap funds require that you have enough time to make up for short-term losses. And as we saw during 1997 and 1998, there are times when the market turns away from small-cap companies altogether for extended periods. (Large caps have taken the spotlight lately due to extreme volatility in the markets; small caps, meanwhile, have floundered.)

But that's no reason to abandon these funds. History would indicate that small companies will eventually regain favor as markets settle down. And when they do, they will likely grow more quickly than their larger cousins -- which can provide a good kicker for aggressive investors who need to build as much wealth as possible while they're young.

Micro-Cap Funds
We're talking small fries here -- companies with market values below $250 million. These funds tend to look for either startups, takeover candidates or companies about to exploit new markets. With stocks this small, the volatility (read risk) is always extremely high, but the growth potential is exceptional. Bridgeway Ultra-Small Company, for instance, sported a three-year average annual growth rate of 15.9% at the end of 1998, but in August, it had just come off a 13-week stretch in which it lost 22.8%.

If you have the time and inclination to pay attention to a fund like this, you might be willing to put some money in. But beware: Micro-cap funds can rear up and bite you.