Small-cap stocks are shares of ownership of small businesses. The market cap is measured by the number of shares outstanding times the price of each stock. These companies do well early in an economic recovery. That’s because interest rates are still low. It gives them easy access to funds to invest in their growth.
Small Cap Stocks Versus Large-Cap and Mid-Cap
Large-cap stocks have a capitalization of $5 billion or more. They are the least risky because their assets will see them through any downturn. Mid-cap companies have a capitalization of between $1 billion to $5 billion. Mid-caps have outperformed small and large-caps over the last 10 years. That’s because they are small enough to grow faster than large-caps during the expansion phase.
Small-cap stocks have an advantage over large-cap and mid-cap stocks during the expansion phase. The stock price will rise along with the company’s growth. Large-cap stocks fall out of favor during the expansion phase. Investors who are chasing returns see them as stodgy and boring.
Small-Cap Companies’ Impact on the Economy
Small-cap companies are an important engine for job creation. That’s because small businesses contribute 65 percent of all new job growth. That’s why the federal government focuses on helping small businesses with loans and grants.
A small-cap company is usually well past the initial start-up phase. That’s because it has to be doing well enough to qualify for an initial public offering. That takes a small business from the private equity phase to being a publicly owned company.
Only invest in small companies that serve large, burgeoning markets like the technology industry for example. This is because the companies can realize tremendous growth with even small market share. The sheer size of the markets creates the potential for huge gains while helping to reduce your risk profile.
Invest in companies before the institutions notice them
This strategy is called robbing the train before it arrives at the station. By gaining a research advantage, we can invest in companies before most big investors get on board. The idea here is that subsequent investments by institutions will drive up the cost of the stock. Therefore, act now before it’s overpriced.