Small-Cap – Definition & Detailed Explanation – Investment and Wealth Management Glossary

What is a Small-Cap Stock?

A small-cap stock refers to a company with a market capitalization typically between $300 million and $2 billion. Market capitalization is calculated by multiplying the company’s outstanding shares by the current market price of each share. Small-cap stocks are considered to be riskier investments compared to large-cap stocks due to their smaller size and potentially higher volatility.

How are Small-Cap Stocks Different from Large-Cap Stocks?

Small-cap stocks are different from large-cap stocks primarily in terms of market capitalization. Large-cap stocks are companies with a market capitalization typically above $10 billion. Small-cap stocks tend to have higher growth potential but also come with higher risk compared to large-cap stocks. Small-cap stocks are often less liquid and may have lower trading volumes compared to large-cap stocks.

What are the Characteristics of Small-Cap Stocks?

Small-cap stocks are known for their potential for high growth and outperformance compared to larger companies. They are often considered to be more nimble and able to capitalize on market opportunities quickly. Small-cap stocks may also be more susceptible to economic downturns and market volatility due to their smaller size and limited resources. Investors in small-cap stocks should be prepared for higher levels of risk and volatility compared to investing in large-cap stocks.

How to Evaluate Small-Cap Stocks for Investment?

When evaluating small-cap stocks for investment, investors should consider factors such as the company’s financial health, growth potential, competitive position in the market, management team, and industry trends. It is important to conduct thorough research and analysis before investing in small-cap stocks to understand the risks and potential rewards. Investors should also consider diversifying their portfolio to reduce risk and exposure to any single small-cap stock.

What are the Risks and Benefits of Investing in Small-Cap Stocks?

Investing in small-cap stocks can offer potential benefits such as higher growth potential and the opportunity to outperform the broader market. Small-cap stocks may also provide diversification benefits to a portfolio by adding exposure to different sectors and industries. However, investing in small-cap stocks also comes with risks such as higher volatility, lower liquidity, and the potential for greater losses compared to investing in large-cap stocks. Investors should carefully assess their risk tolerance and investment goals before investing in small-cap stocks.

How to Build a Diversified Portfolio with Small-Cap Stocks?

To build a diversified portfolio with small-cap stocks, investors should consider allocating a portion of their portfolio to small-cap stocks while also including investments in large-cap stocks, mid-cap stocks, bonds, and other asset classes. Diversification can help reduce risk and volatility in a portfolio by spreading investments across different asset classes and sectors. Investors should also regularly review and rebalance their portfolio to ensure it remains aligned with their investment goals and risk tolerance.