What is A Small Cap Stock?
To understand this term, we first have to know about the market capitalization of a company. In the Market, the total value of the outstanding shares of a company is called market capitalization. In simple terms, total money available to the company on hand. The formula for calculating the market capitalization is multiplying the stock price by the complete number of outstanding shares.
For instance, if 20 million shares of stocks have been issued by a company with the current price of that stock $2 per share, then the market capitalization also abbreviated as Market Cap, of the company would be 40 million. Small Cap, as the name itself, suggests “stocks of a small company” that has the market cap under $2 billion.
In the stock market, the size of a company is not measured by the number of employees it embraces, but rather is decided by the total market value that company holds. Most people automatically assume that small cap companies always holds low stock value than what large cap companies holds. Similarly, nor all firms that have high stock values are always the large cap firms.
Why Small Cap Stocks are Not Considered Good in the Market?
- Generally, they involve a higher risk of loss of the money that you have invested in it. Investors always think 100 times prior investing in the small cap stocks due to their small size that can come up with possible market fluctuations.
- Stock prices are uncertain of course. They can go up or fall dramatically at any time as a result of a number of reasons like economic crisis or bankruptcy etc.
Advantages of Small Cap Stocks
Despite the disadvantages of small cap stocks, there is a flip side. There are also some positive factors that may lead investors to think twice over the investment plan in small cap stocks.
- Investing in Small-Cap Stocks can sometimes turn into great potential of earning better profits in many ways than the big companies that invested in the Large Cap Stock.
- Less Visibility in the Media: As smaller companies are likely to invest in Small-cap Stocks, they don’t get the enough media coverage and visibility. Some well-informed investors make the better use of this media coverage absence and take the benefits of best and attractive valuations which is often get neglected by broader market.