The small cap investments are companies valued between $200 million and $2 billion. This price range is relative and actually changes between different investment brokers. The real point to know about small caps is that they aren’t as easily manipulated by day traders and stock scammers like penny stocks or micro caps, but they aren’t as price inflated as big blue chips.
The small cap definition has nothing to do with the price of a stock like the term penny stock refers to. The “cap” of a stock is determined by the total market value. You can find the market value of any stock by multiplying the price of the stock by the total number of outstanding shares. Companies that are very small can be bought out or have the price shoved around by individuals with a lot of money. Large caps have a problem making big changes because they are already so big. The small cap falls in a nice range for investors because they are large enough to not be pushed around, but still have room for growth and to be nimble in a changing market.
Small cap investments are a real win for the investor who buys and sells his own stocks. This is because mutual funds have a tough time owning any significant amount of small cap stocks. Legally a mutual fund (where most of America’s everyday investment money is sitting) can only own a certain percentage of a company without filing with the SEC. In order to have any significant impact on the mutual fund’s bottom line they would have to buy the whole small cap company of interest. As soon as the mutual fund files with the SEC the stock market is going to react. People will begin to buy the small cap stock knowing the mutual fund wants to own it. The value will dissipate. Even mutual funds that specialize in small cap stocks tend to own so many different small cap stocks (many of which they would rather not own) that their upward potential is diluted with second rate choices.
Since good companies can’t be bought easily by the big buckets of money called Wall Street you still have the ability to buy this value for yourself individually. It’s nice to have one area in investing not dominated by the big players. Small caps are still respected companies that must meet all of the requirements of the major stock exchanges. This improves your risk level because you won’t have any hidden financial surprises.
Small cap investments tend to be poised for longer term solid growth. They have already proved they aren’t limited to local success by growing beyond the big company milestones of $1 million, $50 million, and $100 million. They know how to run a large successful company, manage growth, and provide larger scale success. Yet they are not so large that a 1% growth completely floods the market like a McDonald’s or Toyota. I encourage everyone to find a place in their portfolio for small cap investments.