Small-cap investors are those stock market investors who concentrate their investment opportunities on stocks that have small market capitalization. Although brokerages differ on the exact qualifications, most agree that any stock with between $2 million US Dollars (USD) and $300 million USD in market capitalization qualifies as a small-cap investment. The lure of such stocks to investors is that they offer huge potential for growth and the opportunity to get in on the ground floor of a company before institutional investors become involved. These small-cap investors also have to be prepared to take significant risks, because many of these stocks are unproved and are just as likely to collapse as they are to surge.
When casual observers think of the stock market, they often think of the blue-chip, well-established stocks that have been around a long time and dominate the market. Those views tend to ignore nascent companies that make up a large portion of the stock market and offer investors the opportunity for great growth. Small-cap investors focus on these smaller investment opportunities and utilize them in their portfolios right alongside the bigger names on the market.
The market capitalization of a company is the market price of the company multiplied by the amount of outstanding shares of its stock. Small-cap investors will take chances on those companies whose market capitalization is only a fraction of the overall market within their particular industry. These investors can then hope that such companies will take a significant leap, thus enhancing the stock price and making the investor a significant profit.
What is so appealing about such stocks to small-cap investors is that the investors can reap far larger rewards than they could with a blue-chip stock, provided they get in on the ground floor of a fledgling company that breaks through and gains a bigger share of the market. Although the blue-chip stocks are generally more stable than small-cap stocks, they aren't as likely to provide a sudden, huge jump in profits. In addition, small-cap investors have a better opportunity to grab bargains than institutional investors like mutual fund companies, who are limited in the amount of shares of smaller stocks they can purchase.
Investors in small-cap companies must be wary of the risks involved with these stocks. These companies aren't usually well established, so there is no guarantee that they will survive any financial turmoil. In addition, the fact that these companies are usually just starting out means that there is very little research upon which investors can base their decision. Since this is the case, investors in small-cap stocks should be wary about devoting too much of their portfolio to potentially vulnerable companies.