by Dave Coker

Created on: June 20, 2008

Stock market investors have many - some might argue too many - choices today. But unfortunately, when it comes to money most of us would say we don't have enough. So its critical we carefully plan our investments to insure that we don't lose money.

While planning a investment strategy we can divide the stock market up in lots of different ways; value stocks, growth stocks, dividend paying stocks, fallen angels, the list is endless and at times confusing.

WHAT IS A SMALL CAP?

A very simple approach to analyzing the market is to classify stocks according to what's known as their market capitalization, or "market cap" for short. Market cap is actually pretty simple to calculate: we take the number of shares issued by a company and multiply it by the price per share the company's stock currently trades at (this is a simplification, but close enough for the purposes of our discussion).

For example, let's consider a company that has issued 100 shares of stock. Each share is currently priced at $1.50 . So the market cap of this company is $150, or 100 shares times $1.50 per share. In other words, the value of all shares issued by this company, is $150.

While not all companies traded on the stock market are as cheap as that, the calculation is indeed as simple as that.

When looking at the stock market, we can classify any given company as falling into one of five categories, each reflecting increasing market capitlization : Nano Cap, Micro Cap, Small Cap, Mid Cap, Big Cap. Each category defines an approximate range of market capitalization - you might notice slight differences in the numbers depending upon the source referenced. In any case, once again working from smallest to largest we'd have:

Nano Cap, a company with market capitalization under $50 million
Micro Cap, a company with market capitalization between $50 million and $300 million
Small Cap, a company with market capitalization between $300 million and $2 billion
Mid Cap, a company with market capitalization between $2 billion and $10 billion
And Big Cap, a company with market capitalization of over $10 billion.

Note that some analysts consider companies with a market capitalization greater than $200 billion as "Mega cap", but for this article we'll ignore the classification.

Now that we understand what a Small Cap stock is, why would we invest in such a company? Wouldn't larger, more established companies be safer?

THE ADVANTAGES OF SMALL CAPS

Well, in the stock market bigger isn't always better. Larger companies - "Big

• 1
• 2
• Next Page >>