When you’re deciding which companies to invest in, market capitalization is one of the top factors you should consider. When you choose to invest in a small-cap company — a company with a market capitalization between $300 million and $2 billion — you can enjoy some great returns for taking the risk. Keep reading to learn more about market capitalization, the benefits of small-cap investments, and how to find the best small-cap companies.
What Is Market Capitalization?
Market capitalization, or “market cap” for short, refers to a company’s total value of outstanding shares on the stock market. You can calculate this number by multiplying the number of outstanding shares by the company’s current share price. Though there are more categories, you can break companies up into three major market cap groups:
- Small-Cap: As previous stated, this is a company that has a market cap of $300 million to $2 billion. Small-cap companies are usually just starting out, operate in a niche market, or are in a newly developed industry.
- Mid-Cap: Mid-cap companies are a bit more established and typically have a market cap between $2 billion and $10 billion. These companies are usually in a rapidly growing market or are in the process of expanding themselves.
- Large-Cap: Large-cap, sometimes referred to as big-cap, companies have a market cap of $10 billion or more. Companies in this category have usually been around for a long time and are considered giants in their respective, well-established industries.
Benefits of Investing in Small-Cap Stocks
Much of what makes small-cap investments so risky is also what gives them an incredible potential for success. Some of the things that make them so appealing are:
- When you invest in a small-cap stock, you have a higher chance of getting great returns on your initial investment, whereas large-cap companies have pretty much reached their growth potential.
Small-cap stocks are undervalued and often overlooked by Wall Street. As a result, you can earn much higher returns.
- Because of the SEC regulations on mutual funds, it’s pretty difficult for them to make investments in small-cap companies that are beneficial for their large institution. This gives individual investors the chance to identify and invest in a promising company before mutual funds get a chance.
How To Find Small-Cap Stocks To Invest In
Just like with any type of investment, learning the best tactics can ensure that you make more informed, and therefore more effective trading decisions. Here are some tips to guide you as you search for the best small-cap stocks:
- Invest in industries that perform well with high interest rates: When interest rates rise, some companies take a hit while others flourish. Sectors like consumer foods and goods, utilities, and energy perform really well because interest rates don’t interfere with people’s need for those things.
Search for stocks that pay above-average dividends: You can boost your overall return by choosing small-cap stocks that pay high dividends. Typically, dividends that are higher than 2% are ideal for small-cap stocks.
- Look for companies in good financial standing: When small companies have minimal debt, it’s usually a good indicator that they’ll be able to survive any volatility down the line.
Before you get started trading small-cap stocks, make sure you weigh the risks and do your research. When used strategically, they can be a profitable investment.