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What are the Advantages of Small-Cap Investments?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 18 July 2018
  • Copyright Protected:
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    Conjecture Corporation
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Small-cap investments are investments in stocks that have a small market capitalization, meaning that their standing in the market pales in comparison with established industry leaders. The main advantage of such investments is that investors can experience huge growth from their original investment if they get in on the ground floor of the right company. Whereas blue-chip stocks can offer stability, small-cap investments offer the possibility of huge upside and great returns from small financial commitment. In addition, these smaller stocks are an opportunity for everyday investors to gain an edge on institutional investors like mutual fund companies.

Each individual investor has his own goals for what he wants out of investments when he takes a shot at the stock market. Many people look for stable investment opportunities that will protect their savings and offer measured growth with little risk involved. Others enter the market with the idea of finding bargains that can create personal wealth from a modest starting point. For such people, small-cap investments, sometimes known as penny stocks because of their low prices, might be the right option for their portfolio.

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Different investment firms may define the term to their own specifications, but the general definition of a small-cap investment is a stock that currently holds between $2,000,000 US Dollars (USD) and $300,000,000 USD market capitalization. The amount of market capitalization is determined by multiplying the amount of outstanding shares of the stock by its current share price. Basically, a small-cap stock makes up just a tiny portion of a large sector of the market.

There is always the opportunity for the underlying company of a particular stock to jump up and grab a bigger portion of the market, in which case it could eventually traded at blue-chip prices. The investor who finds such a stock before it reaches such heights stands to make a significant profit from the stock's rise. While small-cap investments certainly are risky because of their unproven track record, an investor who spreads the risk out among several small-caps in her portfolio or even balances them with a few blue-chips can mitigate the risk while still potentially reaping the rewards of one or two small-caps that make it big.

Certain inherent qualities of small-cap investments favor smaller investors over institutional investors, giving those smaller investors a rare chance to drive the market. Institutional investors like mutual funds are limited by regulations from devoting too much attention to a particular stock. If they did wish to invest heavily on a small-cap, the funds would have to receive permission to do so from the United States Securities and Exchange Commission (SEC). This action would only drive the price of the stock up, warning the typical small-cap investor to look somewhere else for a bargain.

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