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When interest rates are low, small cap stocks start to shine and outperform large companies in value. A small-cap stock is a stock with a market capitalization between $ 300 million and $ 2 billion. These stocks are just one of the many asset classes you can hold in your investor portfolio to add a unique layer of diversification and potential no matter where you are in your investment journey.
Overview: Small Cap Equities
When you own a small cap stock, it means you own a stock of a company with a smaller total market cap. Small-cap stocks are most commonly found in tech, industrials, healthcare, and financials. Here are some examples of companies traded as small cap stocks:
- Southwestern Energy Company (NYSE: SWN)
- eHealth, Inc. (NASDAQ: EHTH)
- Cogent Communications Holdings, Inc. (NASDAQ: CCOI)
- LHC Group Inc (NASDAQ: LHCG)
Small-cap stocks typically have a total market cap of around $ 300-3 billion, although those numbers are not set in stone. Market caps can fluctuate as the market does. Companies with a market capitalization of less than $ 300 are generally considered “micro-cap” stocks, while those over $ 3 billion are generally considered “mid-cap” stocks.
Like large and mid-cap stocks, there is an index that tracks the performance of small-cap stocks as a whole. The Russell 2000 Index tracks the performance of the nation’s top 2,000 small-cap stocks, excluding any company that trades below $ 1 per share.
Small cap stocks can be a great addition to any portfolio, as they have the potential for larger growth moves. This means that if you choose the right small cap stocks, you will make more profit than the medium and large cap stocks which move at similar rates. Many small-cap stocks are also value stocks, which is good news for investors looking for stocks under $ 5.
Best online brokers for small cap stocks
Before you can start investing in small cap stocks (or any type of stocks), you need to open an account with a broker. Browse our favorite online brokers for small cap trading below.
Features to look for in small cap stocks
Small cap stocks tend to represent smaller or newer companies. This means you need to adjust your expectations for earnings, leverage, and growth.
Some key features to look for when comparing small cap stocks include:
- A downward trend in debt: Almost all small cap stocks will have some form of debt. In the case of new tech companies, this debt often overshadows the profits the company earns in its early years. But more debt doesn’t have to be a killer – instead of looking at debt by dollar amount, compare this company’s current debt to the debt it reported last year. You should see a downward trend and the assets of the business should be greater than its level of debt.
- A lower price / earnings (P / E) ratio: A company’s P / E ratio compares a company’s profit to its current stock price. Small cap stocks with a low P / E ratio can be an undervalued hidden gem. On the other hand, a high P / E ratio can indicate that a stock is overvalued and likely to see its price drop.
- A growing trend from year to year: When you compare small cap stocks, you should see upward growth every year. Since these offerings have much smaller starting sizes at the start of each quarter, promising small-cap stocks will show much greater growth than mid- or large-cap stocks.
Accentuate Your Portfolio With Small Cap Equities
With significant growth potential and many stocks under $ 10, small cap stocks can be attractive. However, it is important to remember that small cap stocks can also lose value quickly, and they can also exhibit lower liquidity, which can lead to problems if you need to quickly exit your position.
Do your due diligence before buying a small cap stock and only use small cap stocks to complete a portfolio primarily made up of strong and safe index funds, mutual funds, bonds and offers large cap.
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