A small-value stock is one issued by a company that has a small market capitalization, or only represents a small portion of the market. This type of stock can be valuable for investors because it is trading at a price that is either near or lower than its actual value. Many investors feel that this combination represents the best possible opportunity to find a stock that will be profitable over a long period of time. Since a small-value stock does not command a large share of the market, it has the opportunity to grow into a larger player on the market. In addition, value stocks are often considered to be better bets than the counterparts, growth stocks, which may be trading at a premium due to the positive reports associated with them.
Investors playing the stock market are generally in search of stocks that have great potential. That potential might be realized well in the future or perhaps can even be fulfilled in the short-term. If an investor can pick out a company that has the ability to grow in size and is trading at a low price, he or she could be in possession of a potential moneymaker. A small-value stock could represent the best of both worlds to an investor.
The first component that a small-value stock must possess is a relatively small market capitalization. Market capitalization, which is measured by multiplying the outstanding shares of a stock by its market price, is a representation of the portion of the market inhabited by the underlying company. Smaller companies can grow into bigger ones, whereas larger ones have very little room for improvement.
In addition to having a small market capitalization, a small-value stock must, as the name implies, provide value to the investor. What this means is that the stock price is not reflective of the worth of the company that is issuing it. Growth stocks, which are on the opposite end of the stock spectrum, often are issued by highly publicized companies and, as a result, may be selling at a price in excess of their worth.
It is common for a small-value stock to be issued by a company without a big name in a nondescript industry. These realities will often repel investors, even if the company has the chance to be extremely profitable, which will eventually result in a higher stock price. Small-value stocks can, at times, be pulled along by overriding volatility in the stock market, but, if chosen correctly and held for a long period of time, can be the star performers in a portfolio.