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Small Cap

Small Cap

What is Small Cap?

Small cap refers to companies with small market capitalization. The definition tends to change a lot, but it generally refers to companies that have a market capitalization between $300 million to $2 billion.

One of the reasons why people invest in small cap companies is they have a chance to beat the institutional vendors. Mutual funds have restrictions that stop people from acquiring a huge chunk of an issuer’s outstanding shares and some mutual funds don’t give small cap an important position in the fund. In order to overcome these difficulties, the funds have to be filed with the SEC which means inflating the previous price.

Advantages of Small Cap Stocks

Small cap stocks are generally thought of as good investments because they have the potential to grow into large cap stocks. Here are a few reasons that will convince you to invest in small caps:

Growth Potential

A lot of large cap companies start as small business, which means that small cap stocks have a high growth potential. Think about the companies like Apple, Microsoft, and Walmart. These companies started off as small caps, so had you invested in the very beginning your investments would have multiplied enormously by now.

A large cap company can’t grow at the same rate as a small cap company, so if you want to invest in high-growth companies, small caps are the way to go.

Mutual Funds Don’t Invest

Mutual funds don’t invest all their money in one company and small cap companies don’t have the size to support a large investment. SEC has also posed certain restrictions, which gives individual investors a chance to put their money in a promising company.

They Are Not Recognized

Since they are not recognized, this means they get no attention from Wall Street; this lack of recognition can mean that there is a possibility the stocks are not properly priced, which increases the likelihood for investors to have a high probability.

Disadvantages of Small Cap Stocks

Just like everything, there are certain drawbacks to small cap:

Risk

There is a higher degree of risk because you can’t be sure if the investments will bring back profits or not.

Time

To find a promising small cap that shows a great potential of growth will require a lot of time and research.


Further Reading

Corporate governance practices of small cap companies and their financial performance: an empirical study in New ZealandCorporate governance practices of small cap companies and their financial performance: an empirical study in New Zealand
www.inderscienceonline.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

REIT returns and pricing: the small cap value stock factorREIT returns and pricing: the small cap value stock factor
www.tandfonline.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and CanadaThe behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada
www.sciencedirect.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

Creating value in small-cap firms by mitigating risks of market volatilityCreating value in small-cap firms by mitigating risks of market volatility
journals.sagepub.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

The free cash flow/small-cap anomalyThe free cash flow/small-cap anomaly
www.tandfonline.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

Conditional performance, portfolio rebalancing, and momentum of small-cap mutual fundsConditional performance, portfolio rebalancing, and momentum of small-cap mutual funds
www.sciencedirect.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

US stocks in the presence of oil price risk: Large cap vs. Small capUS stocks in the presence of oil price risk: Large cap vs. Small cap
dialnet.unirioja.es [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

'Turn-of the-month'return effects for small cap Hong Kong stocks'Turn-of the-month'return effects for small cap Hong Kong stocks
www.tandfonline.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …

Islamic mutual funds' financial performance and international investment style: evidence from 20 countriesIslamic mutual funds' financial performance and international investment style: evidence from 20 countries
www.tandfonline.com [PDF]
… of Accountancy, Finance and Information Systems (AFIS), College of Business and Economics, University of … Small cap companies may also rely on debt as a source of funding. Hypothesis 5(H5): Debt will have a positive effect on small companies' financial performance …


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