Small Cap Investing Guides
"Small cap" refers to small-capitalization companies and stock. Capitalization is calculated by multiplying the number of outstanding shares of a stock by the stock's market price. For example, a company with 3 million outstanding shares at a price of $3 per share has a market capitalization of $9 million. One of the biggest reasons people like to invest in small-cap stock is for the potentially high returns.
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Capitalization
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According to Forbes, large cap is equal to $10 billion or greater, mid-cap is $2 billion to $10 billion, small cap is $300 million to $2 billion and micro cap is $50 million to $300 million. Good smaller companies often are undervalued because of lack of visibility. As a result, there is often a disconnect been their stock price and fundamentals. You can measure this disconnect by looking at the price-to-earnings ratio. A high or low ratio in comparison with the rest of the industry is a sign that the stock is either oversold or undersold.
Agility
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The most advantageous feature of small business is their ability to adapt. A small-cap restaurant franchise is able to make decisions about market direction and sales must faster than a larger company. Therefore, small-cap companies are naturally better at seizing growth opportunities than larger companies.
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What to look for
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At one point, Wal-mart was a small-cap stock. No one was following it, and there were no news releases about it being the next greatest stock. Beware of small-cap stock sales promising quick returns. Look for smaller companies run by founders with large personal stakes in the company, as well as companies with exponential growth possibilities and international business partners. Small caps that are making large investments in technology could be the breakout stock in three years. Look for cash-generating companies that already pay dividends, and stay clear of companies with debt concerns and a heavy reliance on Wall Street funds.
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