Small cap (or small capitalization) is a reference to a company’s market size. Small cap stocks are stocks from companies that have market capitalization (the number of shares outstanding multiplied by the price per share) of under $1 billion. Investors may face more risk with small caps, but they also have the chance for greater gains.
Out of all the types of stocks, small cap stocks continue to exhibit the greatest amount of growth. In the same way that a tree planted last year will have more opportunity for growth than a mature 100-year-old redwood, small caps have greater growth potential than established large cap stocks.
Of course, a small cap will not exhibit spectacular growth just because it’s small. It will grow when it does the right things, such as increasing sales and earnings by producing goods and services that customers want. As you consider small caps, keep these things in mind:
An IPO is not a sure thing. An initial public offering (IPO) is the first offering to the public of a company’s stock. The IPO is also referred to as “going public.” Because a company that is going public is frequently an unproven enterprise, investing in an IPO can be risky.
If it’s a small cap stock, make sure it’s making money. When you evaluate a company for stock investing, make sure that the company is established (being in business for at least three years is a good minimum) and that it’s profitable.
Investing in small cap stocks requires analysis. You need to do more research on small cap stocks than on large caps. Plenty of information is available on large cap stocks because they’re widely followed. Small cap stocks don’t get as much press, and fewer analysts issue reports on them.