Investment Strategy: Invest in Small Cap Companies

Small cap stocks stands for the stocks of companies that have a small market capitalization. A small market capitalization usually means that the market capitalization is less than $1 billion. A large cap stock stands for the stocks of companies that have a large market capitalization. A large market capitalization usually means that the capitalization is greater than $10 billion.

Small capitalization companies tend to bring greater risk and greater gains. In order to grow, each company must earn money by increasing sales and earnings. That stands for the small cap companies too. As they bring more risk, you should be more careful with this investment strategy.

There are several advantages of the small capitalization companies. First of all, they have a greater growth potential. It would be nice to invest in the companies that will eventually grow like Microsoft or Google. The stocks of small capitalization companies tend to be cheaper and therefore more available. There are more small companies than large ones. For example, there are a few large companies in each sector such as Microsoft vs. Apple, Pepsi vs. Coke etc. Having more opportunities leaves more room to diversify a portfolio.

The definition of large cap and small cap may change over time, and may be different for different brokerage houses. A share price of a small cap company is not necessarily small. Keep in mind that a small cap company have small market share and the money they borrow is expensive which means that such companies carry a greater risk. Also, they tend to use profit to accelerate their growth instead of paying the dividends.