Small cap stocks are generally younger than large cap stocks and this does provide a stronger potential for growth if they are successful. Small cap stocks are more vulnerable to the influence of outside competition as they generally have not cemented themselves in a market or industry the way large cap stock companies have.
This has also proven true in certain instances but broadly speaking they are less likely to successfully negotiate a significant downturn in the economy.
Others may argue that their smaller relative size makes them more agile, with the ability to more quickly adjust to changing market conditions. Small cap shares are considered to be more aggressive and therefore riskier than large cap stocks with their smaller relative size potentially making them more susceptible to fluctuations in the market. Market capitalisation should always be a part of a much more thorough analysis. Likewise, a company at the upper threshold of the definition will likely share more similarities with mid cap stocks than it does with lower end small cap stocks. As mentioned early the classification is used mainly for comparison as a company valued at $250m will not necessarily share many characteristics with a company valued at $2bn. The term small cap may be misleading and what is a small cap stock can vary significantly as these stocks can have a market capitalisation of anywhere from $250m or $300m up to $2bn. As market capitalisation is mainly used to compare the size of a company relative to another the borders do not necessarily need to be sharply defined. Small cap stocks start at $250m or $300m - $2bn and mid cap stocks are between the two at $2 -$10bn. The definition of small and big cap companies can vary slightly from one person or organisation to the next but typically large cap stocks have a market capitalisation larger than $10bn. It is frequently used to make broad assumptions about how a business will grow and perform in the future. It is a valuable evaluation tool as it allows investors to understand the relative size of a company in comparison to others. Market cap measures what a company is worth on the open market based on public perception and what investors are willing to pay for it. It is equal to the share price multiplied by the number of shares outstanding and is frequently referred to as market cap. Market capitalization is the total market value of a company’s outstanding shares. Small cap and big cap are terms used to distinguish the size of a publicly-traded company based on its market capitalisation.
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