What is Small Cap?

Sometimes referred to as a small market capitalization, small cap has to do with the total market value of a business. While there are various standards employed around the world to define a small cap, most financial analysts agree that when the market value is somewhere between $300 million and $2 billion in American dollars, the capitalization qualifies as small cap. Small caps represent a different type of investing option for interested parties, in that the investment in small cap stocks carries a relatively high degree of risk. Along with the risk, a small cap stock also generally carries a significant opportunity for growth.

While it is not always the case, a small cap company is often a smaller company that is relatively new in the industry. The company is demonstrating enough potential to be considered an emerging company. That is, the company has been able to capture a share of the market and appears to be poised for future growth. The finances of the company appear to be stable, which is always a factor with potential investors. Small caps also have begun to issue shares of stock and the stock is trading actively.

What makes a small cap attractive to investors is the potential for small cap growth that could result in a significant return on the shares of stock. Because the company issuing the stock is considered to be up and coming, there is great potential for the price per share to increase over the short term. For investors who wish to realize quick gains on their investments, a small cap can appear to be an ideal investment.

However, the enhanced potential for growth with a small cap also carries an increased level of volatility. Because the small cap is usually an emerging company, the business may still be going through growing pains. As time goes on, the company could encounter unforeseen factors that inhibit the increase in the value of the stock. When this happens, the stock may become stagnant or even begin to fall in value.

Because a small cap is usually classified as a high-risk investment, it is important to carefully consider each aspect of the emerging company before purchasing any of its stock offerings. This includes evaluating the finance prospects for the company moving forward as well as how well it is holding on the market share it has captured up to this point. While there is every chance of making money by investing in a small cap, investors should be sure to qualify the potential and weigh the risks very carefully before proceeding.