Finance Glossary

Wearing the Small Cap

Wearing the Small Cap

 

In the stock market, small cap is short for small market capitalization. A particular company’s market capitalization refers to the current market value of its outstanding shares. Small cap is an approximation that can vary with time and from brokerage to brokerage, but generally speaking, a small-cap stock today has a market capitalization value between $3oo million and $2 billion.

Small-cap stocks have several advantages. They are often over looked by institutional investors such as mutual funds due to regulations on what proportion of a company’s stock a mutual fund can invest in before having to file with the SEC. This means investing in small cap stocks can potentially provide an advantage over such investors. Small-cap companies also generally have more room to grow and historically perform better than large-cap stocks (those with market capitalization of $10 billion or more). However, small-cap companies also come with more risk and volatility, and can be particularly susceptible to broader economic trends. Some investors solve this problem by investing in mid-cap companies, which have a market capitalization between $2 billion and $10 billion.

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