Definition of Small-Cap Stock
What is a Small-Cap Stock
A small-cap stock is the stock of a company with a relatively small market capitalization, which is generally between $300 million and $2 billion USD. Market capitalization, or market cap, is the total market value of a publicly traded company's outstanding shares, calculated by multiplying the current market price of a single share by the total number of outstanding shares.
(Market cap = Share price × Number of outstanding shares)
Small-caps are smaller companies that usually have a narrower market presence, fewer resources and less operational history as compared to mid-cap companies. Current Examples of small-cap stocks are Lions Gate Entertainment (LGF.A), Silicon Motion Technology (SIMO), Agilysys (AGYS) and First Advantage Corporation (FA). To see more small-cap stocks, click here.
Benefits of Investing in Small-Cap Stocks
- Higher Growth: Small-cap companies often have a higher growth potential as compared to larger, more established companies since they have more room to expand their market share, product lines or geographic presence.
- Undervalued Opportunities: Small-cap stocks may be undervalued and overlooked by the market, as they often receive less attention from analysts and institutional investors. This can provide opportunities for investors who conduct thorough research to identify hidden gems.
- Diversification: The addition of small-cap stocks in an investment portfolio can provide better diversification by adding exposure to smaller, niche market segments.
Challenges of Investing in Small-Cap Stocks
- Volatility: Small-cap stocks tend to be more volatile than larger companies, as they are more sensitive to market fluctuations, economic conditions and company-specific news.
- Limited Financial History: Small-cap companies often have limited financial history, making it more challenging to evaluate their performance and prospects.
- Liquidity: Small-cap stocks usually have lower trading volumes, which can lead to lower liquidity and wider bid-ask spreads, making it more difficult for investors to buy or sell shares at their desired price.
When investing in small-cap stocks, it is important to conduct thorough research and evaluate the company's financial health, growth prospects, competitive advantages and management team before making an investment decision. Due to their higher risk profile, small-cap stocks are generally more suitable for investors with a higher risk tolerance and a long-term investment horizon.
GlobEx Markets Financial Dictionary of Terms, Phrases and Concepts
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