SMALL CAP COMPANIES

The term small cap companies refer to those companies that have a small market capitalization. The market capitalization of these companies usually stands between US$250 million and $2 billion. The companies whose market capitalization is below US$ 250 million are referred to as micro caps. The companies whose market capitalization is even lower than that and stands at US$ 50 million are referred to as nano caps. There is no bar for trading of small cap companies on any stock exchange. Though, most of the small cap companies are traded on the NASDAQ and the OTCBB.

There are many of the small cap company whose stock may be trading at less than a dollar but that doesn’t make them a penny stock. These small cap companies have more liquidity for their stock than the penny stocks. In fact most investors should have a part of their investment done in the small cap companies and their stock.

All big cap companies have started their lives as a small cap companies. Most investors talk about finding the next Microsoft or Home Depot. Well if an investor had the foresight of investing in these stocks 20 years ago, then they would be sitting on a rich mound of dollars. Nevertheless there are many small companies that are languishing like rough diamonds that can still be bought. They can also double up their investments values more quickly than the big cap companies. A small cap company with $100 million capitalization can give better and quicker returns than a $5 billion big cap company.

Most mutual funds won’t invest in these small cap companies. SEC places many restrictions on mutual funds to invest in companies. For the funds to get a good return, they would need to invest about 20% of the capitalization of the small cap company. Well the truth is, the mutual funds simply don’t do it. This is where the retail and small investors can invest and if you find the right small cap company, then you can hit the pot of gold quite literally.

Since they are hardly covered in the financial press, there is not much technical data or analysis written about them. Quite simply for this reason, they can also be quite under priced. This can mean a whole world of opportunity for the investors. These are some of the reasons why it makes sense to invest in the funds.

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