SHARETIPSINFO >> Articles Directory >>Small-Cap Stocks: Why to invest? Is it wise to invest in small cap stocks


Stocks are primarily divided on the basis of the market capitalization of the company. This market capitalization is calculated by multiplying the current price of the stock with the number of outstanding shares of the company. Depending on the market capitalization, stocks are classified as large cap, mid cap and small cap. Generally if a company has market capital of less than $1 billion then the stock of that company is called small cap. In almost all the stock market, small cap companies are traded in a specific category and there are large numbers of investors who prefer to invest in these small cap stocks and there are so many reasons behind it.

The primary reason behind investing in the small cap stocks is that all the big enterprises in the world were small start ups at a point of time. So those stocks that are small cap these days are most likely to become big in the future. So if you are searching for the biggest opportunities at the stock market and ready to invest for long period – small cap stocks are best option that you have got. But when we are talking about small cap stocks this long term investment will mean that you have to think in terms of years. It is quite natural that the small cap companies will not turn to large cap over night. So you have to wait for years to see your investment bearing some fruit.

Small companies are more likely to grow rapidly. For simple reasons it is easier to double profit margin for a company worth $ 1 billion or less than a company with a market capital of few billions. So for obvious reasons small cap stocks give good return to the investors as they rise in the market more quickly than the large cap stocks. So even if you are investing for short term, good small cap stocks can get you good return.

Small cap companies sometime can take risk and benefit from opportunities that the bigger companies can not afford to take because of their huge set up and responsibility. This is one of the reasons that the small cap companies make more profit in significantly short period of time. So investing in small cap companies at the right time can multiple your investment in a comparatively short span of time which is otherwise impossible with a large cap company.

Small cap stocks are more market sensitive than the large cap stocks. That means they react to the market trend more intensely than the large cap stocks. The movement of the price level of the small cap stocks is more rapid and in accordance with the market trend. So it is quite natural that if you can read the trend of the market well and invest in the small cap stocks accordingly, you can benefit from frequent movement of the small cap stocks.

Small cap stocks go mostly unnoticed by the larger portion of the investors and moreover the mutual funds never invest in the small cap stocks. So the small cap stocks are hardly over priced. So even with a minimum investment portfolio you can own large number of shares and gain from it. It is therefore profitable to locate some really potential small cap stocks in the market and invest in them.

Whether you are investing for long period or short term, small cap companies can get you good profit. There are host of the benefits of investing in the small cap stocks and it is always wise to have 20% to 30% small cap stocks in your portfolio according to the experts.

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