What are Small-Cap stocks and why they matter?
The term “small-cap” is a definition of small-cap that can vary among brokerages, but it is generally to identify stocks that have a market capitalization of between $300 million and $2 billion.
One thing should be noted that classifications such as large-cap or small-cap are only approximations that change over time. Also, the exact definition can vary between brokerage houses.
Market capitalization or market cap means the total value of a company’s outstanding stock shares. It’s calculated by multiplying the total number of shares issued by the market price of a single share.
You can find small caps in virtually any stock market sector, including healthcare, finance and tech. Studies show that small-cap stocks, and particularly small-cap “value” stocks, provide a higher return over time than other types of stocks.
The advantage of investing in small-cap stocks is the opportunity to beat institutional investors through growth opportunities. Small-cap stocks have historically outperformed large-cap stocks but have also been more volatile and riskier investments. They often have lots of growth potential, but they may also have less stability and market share than larger, established companies.
Let's assume Company XYZ currently trades at $50 per share and has a total of 10 million shares outstanding.
Market Capitalization = Number of Shares Outstanding x Current Share Price
Therefore, Company XYZ's market cap would be:
10,000,000 x $50/share = $500 million
By most standards, with a market cap of just $500 million, XYZ would widely be considered a small-cap company. Note, though, that despite the company's small size, its share price is not particularly low. Contrary to what some mistakenly assume, not all small-cap companies have low stock prices. Nor is it appropriate to automatically assume that those with high prices will always be large-cap firms. Stock prices by themselves reveal little about the size of a company, which is why market capitalization is such a widely used measure.
Financial stocks are the largest sector group within the small-cap value world.
Finding small-cap stocks can be time-consuming, but good research can pay off. Figuring out which companies have good management, strong financial, and the potential for growth is worth knowing vs. just grabbing a handful of small caps and hoping for the best.
Nonetheless, some small-cap stocks have the potential to take-off and become the next big thing.
Investing in small-cap stocks can be rewarding. It’s a chance to discover the next Microsoft, Apple, or Google. Learning about the fundamental and technical analysis can help you reveal if a particular small-cap has great growth potential or not.