Small Cap Stocks

Small cap stocks are offered by relatively small companies that are publicly listed. A small cap company has a low market capitalization ranging between $300 million to $2 billion. Small cap investors have a high-risk, high-reward approach.

These stocks are usually available at a low price, despite massive growth potential. They are also very volatile—extremely sensitive to market fluctuations. As a result, small cap investments offer superior returns in the long run and may not be profitable in the short term.

• Small cap stocks are offered by small public companies which hold market capitalization of $300 million to $2 billion. Characteristically, these businesses have tremendous growth potential.
• In favorable markets, US small cap investments are often seen outperforming large-cap. But, small-cap companies are more likely to fail in a recessionary scenario—they are not big enough to survive massive losses.
• To mitigate risk, investors always combine small cap with stable investment products. By doing so, they maximize the average return of the whole portfolio.

When a small cap company trades equity, it is referred to as a small cap stock. Newly established businesses with massive growth potential are called small cap companies. The market capitalization of small cap companies ranges between $300 million and $2 billion.

The Russell 2000 is a small cap index that replicates the performance of two thousand small cap stocks in the US. It is known to exceed the performance of the S&P 500—five hundred large-cap public companies in the US.

Holding small cap equity in isolation is too risky. Therefore, investors diversify their portfolios by combining large-cap and mid-cap stocks with small cap options to spread the uncertainty. In a favorable market, portfolio diversification improves the overall returns. Even then, small cap risks cannot be overlooked—many fail miserably and become bankrupt.

The following characteristics distinguish these stocks from other investment instruments:

• Low Price: Due to low market capitalization, the price of these stocks are usually low, and therefore affordable for small investors.
• High Risk: Small companies are very sensitive to market fluctuations.
• High Return: These investments have the potential to generate huge profits in favorable market conditions.
• Long-term Perspective: They offer positive returns in the long run. However, short-term holdings of small cap stocks may even result in losses—due to high market risk.
• Taxable Gains: The profit earned by selling these stocks comes under the investor's taxable income.
• Low Liquidity: They are not very liquid—they are not available at the favorable price for purchase—cannot be sold at the desired price.

The performance of US small cap stocks has surpassed the returns of US large-cap stocks. As a result, there is scope for massive gains in the long term. Moreover, these companies can grow fast because they are at a flourishing stage where they can innovate and take risks.

Small cap companies greatly impact a nation's economy —they increase job opportunities. However, due to low market capitalization, they are not given due consideration from business analysts—most valuations of small cap stocks are inaccurate.

Following is a list of the best small cap stocks to buy as of 2022:

1. Portillo'sPortillo's Inc. (PTLO) 
2. Global Blood Therapeutics Inc. (GBT)
3. Bright Health Inc. (BHG)
4. Allogene Therapeutics Inc. (ALLO)
5. BridgeBio Pharma Inc. (BBIO)
6. Vnet Group Inc. (VNET)
7. Vroom Inc. (VRM)
8. BTRS Holdings Inc. (BTRS)
9. Sangamo Therapeutics Inc. (SGMO)

The pandemic has paved the way for small cap companies to innovate and grow. Nasdaq recommends the following small caps for 2022:

1. Titan International, Inc. (TWI)
2. One Stop Systems, Inc. (OSS)
3. Beazer Homes USA, Inc. (BZH)
4. Lazydays Holdings, Inc. (LAZY)

This article has been a guide to what are small cap stocks & its definition. We list best high growth small caps stocks/indices & discuss how to find/buy/hold them. You may also read articles on corporate finance -

• Buffer Stock
• Types of Stock Options
• Large Cap vs. Small Cap Stocks
• Calculate Volatility