When we talk about Cap in the stock market, we mean Market Capitalization, or market value. It simply means how much the entire company costs if you were to buy every single share they have issued. We often divide companies into Large Cap (the elephants) and Small Cap (the mosquitoes).
"Every great work started with a small seed."
— Florence Scovel Shinn
The quote is spot on for Small Cap companies. All the giants we know today started as a tiny mosquito with great potential. For you as an investor, the choice is about how much risk you are willing to take.
The differences in practice
High risk, high reward: It is much easier for a small company worth 100 million to double its sales (and thus double the stock price), than it is for a company worth 1000 billion. Small Cap provides the greatest returns, but also the most bankruptcies.
Large Cap (Large companies)
- Safe, solid, and less affected by small economic fluctuations.
- A lot of information and analysis is readily available.
- The stocks are highly liquid (easy to buy and sell).
Small Cap (Small companies)
- Greatest potential for explosive growth.
- Rarely picked up by the big funds before they have grown larger.
- Can be difficult to sell if the market suddenly dries up.