Small-cap stocks refer to the stocks of companies with a relatively small market capitalization. Market capitalization is the total market value of a company's outstanding shares of stock, calculated by multiplying the number of outstanding shares by the current market price per share.
There is no hard and fast rule for what constitutes a small-cap stock, but generally, companies with a market capitalization between $300 million and $2 billion are considered small-cap stocks.
Small-cap stocks are often associated with higher growth potential, but also higher risk, than larger, more established companies. They tend to be less well-known and less researched than larger companies, which can make them more volatile and unpredictable. However, small-cap stocks can also offer greater opportunities for capital appreciation and higher returns for investors who are willing to take on the added risk.
What is the difference between small-cap and large-cap?
The main difference between small-cap and large-cap stocks is their market capitalization. Small-cap stocks have a market capitalization between $300 million and $2 billion, while large-cap stocks have a market capitalization of over $10 billion.
Here are some key differences between small-cap and large-cap stocks:
1. Growth Potential: Small-cap stocks are often associated with higher growth potential compared to large-cap stocks. Smaller companies typically have more room to grow than larger, more established companies that have already experienced significant growth.
2. Volatility: Small-cap stocks are generally more volatile than large-cap stocks due to their smaller size and lower liquidity. This means that small-cap stocks can experience bigger price swings in response to news or events.
3. Risk: Investing in small-cap stocks can be riskier than investing in large-cap stocks due to their smaller size, lower liquidity, and higher volatility. However, small-cap stocks can also offer greater opportunities for capital appreciation and higher returns for investors who are willing to take on the added risk.
4. Diversification: Including both small-cap and large-cap stocks in a portfolio can help diversify risk. Small-cap stocks have different risk and return characteristics than large-cap stocks, which can help to balance a portfolio.
Overall, small-cap and large-cap stocks have different characteristics and can play different roles in a diversified investment portfolio. It's important to consider your investment goals, risk tolerance, and time horizon when deciding which type of stock to invest in.
Are small-cap stocks risky?
Yes, small-cap stocks are generally considered riskier than large-cap stocks. This is because smaller companies typically have a more limited operating history, smaller market share, and fewer resources than larger, more established companies. As a result, small-cap stocks are often more sensitive to changes in market conditions, company-specific news, and other factors that can impact their performance.
Here are some of the key risks associated with investing in small-cap stocks:
1. Volatility: Small-cap stocks tend to be more volatile than large-cap stocks due to their lower liquidity and smaller market capitalization. This means that small-cap stocks can experience bigger price swings in response to news or events.
2. Limited information: Small-cap companies are often less well-known and less researched than larger, more established companies. As a result, there may be limited information available to investors, which can make it harder to evaluate the company's prospects and potential risks.
3. Liquidity: Small-cap stocks may be less liquid than large-cap stocks, meaning that there may be fewer buyers and sellers in the market. This can make it harder to buy or sell shares quickly, which can impact the price of the stock.
4. Financial risk: Small-cap companies may have a more limited financial history, which can make it harder to evaluate their financial strength and stability. This can increase the risk of bankruptcy or default.
Despite these risks, small-cap stocks can also offer greater opportunities for capital appreciation and higher returns for investors who are willing to take on the added risk. It's important to carefully evaluate the risks and potential rewards before investing in small-cap stocks, and to ensure that your investments are diversified across different types of stocks and asset classes to manage risk.