Understanding everything that is involved in investing or trading small cap stocks takes study over a period of time. Many favor large cap stocks over small cap stocks because the brands are known. But which is better for you and your situation? Investing in small cap stocks is a great way to diversify your portfolio with some shares of lower capitalized companies. These stocks often offer better returns as they have higher beta values and move quicker than other stocks. Just be careful of the risks.

If you are looking to purchase and hold small cap stocks within mutual funds, understand that different funds define what is a small-cap stock in different ways.The traditional definition of a small-cap stock is one with the market capitalization between $300 million and $2 billion.

A few other characteristics of small caps:

-They're generally focused on domestic business lines, making them dependent on U.S. economic conditions.

-Their revenue comes from only a few lines of business.

-They're also more subject to U.S. taxes and regulations than large cap companies are.

Large cap companies, on the other hand, will be dealing in market capitalizations of over $10 million. These are generally well-known, publicly traded companies.

Many large-cap companies have already gone through their most aggressive (and most risky) growth period, and as a result, they offer investors stability. What is sacrificed, however, is the potential for those big returns that can crush the market.

Small-cap stocks have always been a good bet for investors, and have been outperforming large-cap stocks for decades. Of course, the performance rating of smaller or larger companies will always vary over time, depending on based on overall economic climate. n recent months, returns on small caps have declined, perhaps signaling a loss of faith in the market or for political reasons.

Fundamentals of small caps investing - part 1