| We can analyze stocks by organizing them by their | | | | shares. |
| market capitalization. Market cap is computed by | | | | 3. More risky - Small cap stocks are riskier than |
| multiplying the share price by the number of shares | | | | medium and large cap stocks because they may not |
| outstanding. For example, if a stock was trading at | | | | have the stable cash flow, deep management talent, |
| $75 per share, and it had 1 million shares outstanding, | | | | clout, and lines of credit to weather strategic |
| its market capitalization would be $75 million. | | | | mistakes and/or down markets. Since the stocks |
| In this article, we will examine small cap stocks. | | | | aren't heavily followed and analyzed by Wall Street |
| These are companies with market caps between | | | | firms, investors may not learn about bad news |
| $300 million and $1 billion. | | | | before the share price fully reflects the information. |
| Here are some of the features of small caps: | | | | 4. Less insulated from stock market trends - Not only |
| 1. High growth rates - Small cap companies are usually | | | | do small companies themselves lack the resources to |
| in growth mode. Either they are selling a new product | | | | resist bear markets, but investor behavior itself |
| or service, or else they are well-established in a | | | | exaggerates the effects of market conditions. |
| certain region and are looking to expand. This means | | | | Investors are quick to jump out of small caps when |
| that the stock price may appreciate a lot in the near | | | | the market turns down, and they are quick to jump |
| future, as earnings and sales increase. | | | | aboard during bull market runs. |
| 2. Less well-known and analyzed - Small caps are | | | | Remember that your portfolio should not consist |
| usually not extensively followed and analyzed by Wall | | | | solely of small cap stocks. For diversification, your |
| Street. Most of their outstanding shares are not | | | | portfolio should contain stocks that have been |
| owned by mutual funds, pension plans, and | | | | selected from among all the market cap categories. |
| endowments. This means that the stocks have more | | | | Success in stock trading depends on both stock |
| chances to be inefficiently priced, thus giving small | | | | selection and having a system for knowing when to |
| investors more opportunities for buying under-priced | | | | buy and sell. |