May 20, 2015

Big Cap and Small Cap Stocks

By Wendy

Small cap and big cap stocks are misunderstood by many in some cases. But they’re usually understood on a superficial level.

Big cap or large-cap stocks are shares or larger companies.  The small-cap ones are shares of smaller companies. The labels like these can be misleading because many run under the assumption that they can only make money by investing in the large-cap stocks.  But that’s actually not all that true since small-cap stocks have gotten big, and because of this, you’ll be able to make some good investment options because of this.

Small cap stocks are considered good because they have low levels of valuations, and there is potential for them to grow into big cap stocks.

However, the definition of small-cap has been changed over time.  What was considered a big cap in 1980 is now a small-cap stock, and it’s important to understand that? Small-cap stocks shouldn’t be overlooked, and the big cap doesn’t always mean larger returns on the investment. However, small-cap stocks have a cap on the market of anything from $300 million to $2 billion, and they may outperform the larger cap peers as well.

These stocks are oftentimes scaled, and they’re usually don’t by multiplying the price of a stock by the number of outstanding shares. While this is common in capitalizing the market, you should understand the market value of the companies and their bonds in order to determine the total value.

The market cap will show the size of a company, which is something that interests most people, since it points out the key characteristics, including risk assessment. While the value of these cap stocks may vary, these can range from the small value as stated above, to more than $2 billion.

The misconception that small caps are startups is based on the new brands which are coming out, but this is far from the truth. Many of the small cap companies are just like the larger boys in that their track records are strong, they are well established, and their financials are great. Just because they are smaller, they tend to have a greater chance at growth as well, since that means more potential for the investors to make more money as a result of this.

The big boys and the blue chip stocks which have a history of good earnings and strong financials are commonly known as the big cap stocks. While these are good since they do offer safer returns for those who invest, you can’t use this as a blanket for every large cap stock. Some have the misconception that large cap comes with less of a risk, but the smaller ones have more due to their value.  However, the big boys also can go downhill.

Just look at Enron.  They’re one of the biggest examples of the bigger they are, the harder they fall.  They used mark to market accounting to make it look like they were profitable, when in reality they were losing a bunch of money.  The large cap stocks sometimes aren’t all that honest, and if there are criminal charges and the like behind this, it could mean curtains.

Remember, the big stocks and the small stocks don’t always mean big profits or small profits, and the best thing to do is to do your research on this, and to look into what they do.