Small Cap Stocks: How to Find and Buy Them

Small cap stocks can grow fast and are cheaper than large cap. These lesser known stocks have the potential for huge returns. Then practice what you've learned with our free stock market simulation.

SMALL CAP STOCKS LIST

Symbol Company
CHGG Chegg Inc.
IRBT iRobot Corp.
ZUO Zuora Inc.
AAXN Axon Enterprise Inc.
WTW Weight Watchers International Inc.
SFIX Stitch Fix Inc.
ROKU Roku Inc.

WHAT ARE SMALL CAP STOCKS?

Small cap stocks are not actually that small. Small cap refers to the market capitalization of a company. While the range can vary depending on who you ask, small cap refers to a company with a market capitalization between $200 million and $2.5 billion. But what does that mean? Market capitalization has two parts, share price and number of outstanding shares. Multiply those two numbers together and you get what is called market cap. Share price is simply the price that a given stock sells for on the marketplace. Outstanding shares on the other hand, refers how many shares the company has issued. Small cap businesses are established, but are dwarfed by tech giants like AAPL, which has market capitalization at over $700 billion.

 

HOW TO FIND SMALL CAP STOCKS TO BUY

Small cap stocks are everywhere. These companies aren't your big fish that everyone has heard of, but can offer great returns in their own right. One of the best attributes of small cap stocks is that they have great growth potential. You hear all the time about people who invested relatively small sums into tech companies like GOOGLE and made ridiculous amounts of money. Invest in the right small cap stock and that could be you.

The reason these smaller stocks are able to grow so fast is that they still have a relatively low market capitalization. Its just not possible for bigger companies to grow as fast because they would eventually become unsustainably large. On other hand, a smaller company can double its market cap many times over as they come into their own. Choosing the right stock is the key to investing in smaller stocks.

Small cap stocks are great because their is less competition from institutional investors. Their funds are so massive that buying a smaller company has little effect on their bottom line. That means a level playing field, and great value with lucrative rewards. Every giant was once a small fry. Who knows what the next Microsoft will be?

 

SMALL CAP MUTUAL FUNDS

While it is difficult for mutual funds to invest in small cap stocks, there are some who specialize in taking positions in smaller companies. These mutual funds are highly specialized and require tons of man power due to the number of businesses they invest in. Because small cap mutual funds can only invest so much in each company, they end up investing in hundreds of different small companies. This can be a lot to manage considering each business has their own growth and risk.

Fund management can really shine when it comes to picking small cap stocks. That's because any hidden gem can result in a enormous return as they balloon in size. Imagine buying shares in tech giants like Microsoft, Facebook and Google before they made it big. When a fund manager hits a home run, anyone who invested in that mutual fund stands to make some cash. Look for well managed funds because the return will outweigh the manager's cut of the profits.

Not all small cap stocks turn into giants, its actually quite rare. That's why small cap mutual funds diversify into hundreds of different companies. Even if they don't get lucky, a lot of small cap stocks still have great value.


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