Small-Cap Stocks – Meaning
Small-Cap stocks mean the stocks from companies that have a relatively small market capitalization. Market capitalization means the market value of its outstanding shares. Small-cap stocks generally stand to define a company with $300 million to $2 billion in market capitalization, and they are not exactly the smallest of companies in the market. On the overview, here are the current definitions of company stocks based on capital:
- Mega-cap: Market capital of $200 billion and greater
- Big-cap: Market Capital $10 billion and greater
- Mid-cap: Market Capital $2 billion to $10 billion
- Small-cap: Market Capital $300 million to $2 billion
- Micro-cap: Market Capital $50 million to $300 million
- Nano-cap: Market Capital Under $50 million
Also Read: How to Choose the Best CFD Trading Platform
Some Famous Small-Cap Stocks Right Now
Best Value Small-Cap Stocks:
Dynex Capital Inc.
A real estate investment trust (REIT), and invests in mortgage loans and securities on a leveraged basis. It holds investments in both residential and commercial securitized mortgage loans.
It is a Bermuda-based global insurance and reinsurance company. It has insurance lines for environmental, property, energy, workers compensation, along with aviation and space.
Home Point Capital Inc.
It is a holding company operating as a residential mortgage originator and servicer. It primarily operates through a wholesale or business-to-business-consumer model. The company had reported a net income of $149.0 million, a significant turnaround from the $10.6 million net loss posted in the year-ago quarter.
The Fastest Growing Small-Cap Stocks:
Corsair Gaming Inc.
It is a company that sells gaming and streaming peripherals, components, and systems. The equipment they handle allows creators to produce studio-quality content. Recently the company’s cost of revenue and operating rose at a slower pace than revenue, which helped boost the net income.
eXp World Holdings Inc.
It is a holding company, through its subsidiaries, designs and develops cloud-based, agent-owned real estate solutions. The company has announced in early May financial results for Q1 FY 2021, which ended March 31, 2021. The net income has increased by 3,336.9% as the revenue rose 115.1%.
It operates as a bank holding company through its subsidiaries and provides a range of banking products and services. It is a company that offers savings accounts, debit and credit cards, business and personal loans, online banking, mortgage, and more.
High Momentum Small-Cap Stocks:
Cassava Sciences Inc.
Cassava Sciences is a clinical-stage biopharmaceutical company, and they develop drugs using proprietary tech. They are also a company focused on developing drugs for the treatment of the nervous system.
Cambium Networks Corp.
It is a company that offers wireless broadband solutions. They provide a point-to-point and a point-to-multipoint platform for video, VoIP, Wifi, switching, software, and accessories.
How can you Benefit from Small-Cap Stocks?
Adding small-cap stocks to your investment portfolio could have a lot of benefits. If you usually are someone who always invests in large-cap stocks, here are a few reasons why you could also consider small-cap stocks.
Small-cap companies can match or sometimes even beat the performance of large-cap stocks over time. And that is something the headlines quite often miss out on. When the market is up for big moves, it is the biggest of the companies that get most of the attention. Just say the price of Google or Apple takes a serious nose dive, then they are most likely going to make the headlines.
But, did you know in 1979 and 2015, small-cap stocks in the Russell 2000 index had outperformed large-cap stocks in the S&P 500 20 times within 37 years. The average annual return on investments in small and large-cap company stocks was virtually neck to neck. And with the S&P 500 paying off investors back 11.7% annually versus the 10.3% annual returns generated by the Russell 2000 index. Over the long-run view, investing in small-cap stocks may be as profitable as large-cap, and it is worth giving a shot.
2. The Growth Potential
Compared to larger counterparts, small-cap companies tend to be in better positions when it comes to growth. Ones investing in small-cap momentum stocks have a better chance of getting to the ground floor before a company can explode in size and its stock value skyrockets. If you can buy small-cap stocks for lower prices, there is a pretty big chance you can collect a tidy profit later on if the companies you chose to invest in grow tremendously.
3. A Diversification
Diversification is a critical component for every investor. It involves spreading the amount of risk they are taking on. Having a diverse portfolio can provide an investor with insulation from market volatility. For instance, let us say you are primarily investing in mutual funds, then don’t you think you would be missing out on investing in other assets.
Pros and Cons of Small-Cap Stocks
As we know, already small-cap companies have greater growth potential, and because they have a smaller operational and financial base, it is much easier for them to grow. They don’t hold a financial cushion to withstand crises or poor management too, and they also do quite well with an economic recovery because the interest rates are still low.
On the other hand, they are not very well covered by the media or financial reports, which makes them harder to find.
On the whole, there are two sides to every coin which means also for small-cap stocks:
- Growth Potential
- They do well with low-interest rates
- It is easier to find underpriced stocks
- They do the worse in a recession
- Time-consuming to research
The Bottom Line
A small-cap company is one that is well past the initial stage of a business. It is one that is doing well enough to qualify for an IPO [Initial Public Offering]. The United States small-cap stocks are some that have historically generated attractive investment returns and outperformed large-cap stocks. The key to investing in small-cap stocks is the opportunity to capture the benefits while minimizing the risk component of it.