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:
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:
There is a higher degree of risk because you can’t be sure if the investments will bring back profits or not.
To find a promising small cap that shows a great potential of growth will require a lot of time and research.
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