You don’t hear too often about small cap funds or socks from Wall Street pundits, the media, or economic analysts on television at night. Small cap stocks involve investing in small market capitalization, lesser-known organizations which are up-and-coming; not typically the type of investments that veteran large investment firms seek out. However, though they obtain less notice than their “wealthier siblings”, small cap investments can be a huge opportunity for an individual shareholder to get in on the ground-floor of a fledgling corporation like Microsoft back in the 1980s. After all, that’s how many of the large cap players on the Street began!
The advantage of investing in small cap stocks is that there is a change of much superior growth, dollar for dollar over a year’s period. Your buck can grow exponentially as the business begins to increase momentum in revenue and earnings, thus allowing your asset to double, triple, or multiply by tenfold. This is not to say that merely focusing on small caps is the correct way to develop your investments either, however, giving them a section of your portfolio makes good logic.
Small caps, also called small cap stocks, are a condensed description of the name “small capitalization stocks” because they entail smaller companies with an undersized market capitalization. This normally refers to companies with market capitalizations below 2 million and above 300 million dollars. This expression, market capitalization, essentially refers to the price of the stock multiplied by the amount of outstanding shares. This equates to the company’s value, as determined by the market itself at any given time.
Large caps on the other hand ought to have a position in your investment portfolio too. Though some investors will direct putting your cash into strictly larger cap investments, the truth is that they aren’t always the steady, consistent, and secure places to be invested. Sure, blue chip stocks are a great investment if you are guarded and conventional in your risks. With the collapse of Enron and the recent banking industry (Bear Stearns) and insurance company woes (AIG), these bigger stock failures surely convey the real risks involved in any large cap funds as well.
Yet overall large cap stocks are not as risky of an investment as buying small cap stocks. However, with the safer route (the larger cap), you can expect to see safer, more old school gains. This is why small caps are such a great investment for the individual investor. By choosing a precise sum of money to risk, investing in a small cap stock or fund can set you up for better growth as the company’s return grows and as their status in the market gains traction. Increased risk can surely bring increased returns on investment as we saw during the early 90s. But buyers beware; diminish the total sum in each small cap stock you invest in so your portfolio is more diversified. In other terms, don’t put all o your eggs in one “small cap” basket!
Always confer with your investment professional before making a decision about which small or large cap investments to build. The bottom line is that, through cautious planning and examination, your investment portfolio can give you superior returns when you add small cap investments in the midst of your large cap stock purchases. Successful investing!
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