Investments in small-cap companies have the potential to offer some of the highest returns. This is the reason small-cap stocks are increasingly popular. However, investing in small-cap firms comes with its own pros and cons. This is exactly what we shall set out to explore in this article. Moreover, we shall also see how small-caps differ from large-cap investments.
Understanding Small-cap Stocks
When first considering this exciting area, it is imperative to understand what small-cap stocks actually mean. The term is used to refer to companies which have small market capitalizations. The figure generally varies between $300 million and $2 billion.
Since there are no clear specifications and guidelines as to what constitutes small, mid, and large cap companies, it is important to note that such definitions serve as a rough benchmark.
Small-cap stocks offer some unique advantages over large-cap stocks. First, they can help individual investors win. This is because institutional investors do not often invest into small-cap stocks until they grow considerably in size. Furthermore, the lack of available research and information about small-cap stocks and firms can often mean that you could get your hands on some incredible small-cap stocks at low prices.
It is a well-known fact that the performance of small-cap stocks has far surpassed that of large-cap companies. However, for those who prefer investing in large-cap companies and enterprises, it might be a great option taking a middle path. You could consider choosing mid-cap stocks instead. On one hand, mid-cap firms offer greater growth potential than the large-cap companies. On the other hand, they are more stable than small-cap firms. Such stocks pertain to companies with market capitalization in the range of $2 billion to $10 billion.
However, it is important to realize that like all investments, small-cap stocks can be risky. There are volatility considerations. In addition, there’s also a lack of information and resources which necessitates diligent research on behalf of the investor.
How Can You Calculate Market Capitalization?
So, to focus your attention on the small-cap firms, you will first need to identify them by calculating their market capitalization. This is done simply by multiplying the current share price by the number of outstanding shares. There are many free resources which do this for you, like finance.yahoo.com.
Once you’ve calculated the market capitalization, it’s easy to identify the small and mid-cap stocks and firms. You can then begin due diligence into these companies and figure out the credibility of their company management as well as examine their financial statements.