A small cap stock is one issued by companies that have less than a 2 billion dollar market capitalization. Many investors are interested in small cap stocks because they offer investors growth opportunities they couldn’t easily obtain from large cap stocks. The return on investments from small cap stocks is likely to be greater than that of large caps.
Small cap companies tend to be very aggressive and eagerly seek out new market opportunities because they are interested in rapid growth. Since many of these companies offer new products or services, it is easy for them grow quickly and provide capital gains to their early investors.
The benefits of small cap companies:
- Focused on gaining market share
- Reinvest earning back into their business
- Leaner than large corporations
- Thriftier with their money
The proof is in the numbers: here, Morningstar compares the three- and five-year returns on large, medium and small cap stocks