Generally, there are only a few ways to get rich quickly:
- Win the lottery
- Inherit money
- Put money into things that appreciate quickly
Since you have no control over the first two, let’s talk about the third. Specifically, we’ll discuss small-cap stocks vs. large-cap stocks and why investing in small-cap stocks can be a quick way to generate money!
What Are Small-Cap and Large-Cap Stocks?
Large-cap or big-cap stocks are shares in a company with a valuation of over $10 billion. The term “large cap” comes from the phrase “large market capitalization.”
These big-cap companies are usually more established, and their stock prices fluctuate mildly and reliably. Companies like Visa, Microsoft, and Apple are safe bets with regular dividends and consistent share value.
Then what is a small-cap stock? By definition, small-cap stocks are smaller than large-cap stocks. These are shares in smaller companies valued between $300 million and $2 billion.
These companies can experience growth or attrition far more quickly than large-cap companies, and this is where the value for you, the investor, comes into play.
Isn’t There More Risk with Small-Cap Stocks?
Small-cap companies can be more volatile regarding their valuations, profits, and relationships with investors.
But when deciding whether to invest in large vs. small-cap stocks, or some combo of them, you have to determine what amount of money you want to make in a given time and decide whether these stocks are worth the risk.
The fluctuations in price for small-cap stocks can be dramatic, with high percentage growth outpacing the market.
If you want to make money in the stock market in the short term and aren’t risk-averse, small-cap stocks are where you want to put your money. What are small-cap stocks if not a method for you to grow your fortune?
There’s Always Risk
Not to scare you away from investing or make you feel uneasy about the market, but even big-cap companies can go under. Remember Enron? They were a large-cap company that lost stockholders vast sums of money.
And just because a company is labeled “small cap,” don’t go thinking they’re some fledgling startup.
These companies are still worth in the hundreds of millions to billions of dollars and have every bit as much incentive to succeed long term as any company ten times their size.
Market Capitalization and Company Value
At this point, you may be wondering what small-cap stocks or big-cap stocks represent.
Let’s say a company has 30 million shares valued at $10 each. That company would be worth $300 million, the bare minimum to be considered to be a small-cap in the market’s eyes.
Market capitalization is not the enterprise value of a company, and it doesn’t determine the cost of buying or merging with the company.
Market capitalization shows a company’s equity, while enterprise value adds in debts and subtracts cash from that figure.
Which is Better for Companies, Being Large Cap or Small Cap?
Stepping away from the investor perspective for a second, what are the advantages and disadvantages for companies having small-cap vs. large-cap stocks?
If a company is a large cap, it has more leverage for borrowing power. Banks can reasonably assume the company won’t disintegrate soon and will lend at good rates. Corporate bonds for large-cap companies can be sold at advantageous rates, as well.
However, small-cap companies can experience larger and faster growth. Even without the advantages of brand recognition and favorable rates, this potential growth brings more attention and investor interest.
Of course, if the company grows enough, it can eventually become a big-cap company.
When Cap Size Changes
If a small-cap company continues to grow and the market cap increases, it can become a large-cap company.
If stock values rise enough to push the market cap over the $2 billion thresholds or decrease enough to drop it under $300 million, that company’s status will change. The company can also repurchase shares to alter its cap size.
When companies issue new shares in their company, existing shares can drop in value. This phenomenon is called dilution, which means that each stockholder is, in essence, an owner in a smaller percentage of the company than before.
This change can result from investors issuing warrants, which create new stocks rather than giving already-existing ones when exercised.
Let’s Talk Investment Strategy
Okay, enough theory — let’s get down to brass tacks. Your portfolio needs to be diverse, regardless of whether you want long-term stability or short-term gains.
Let’s look at the advantages and disadvantages of large vs. small-cap stocks:
Large-Cap Stocks
Advantages:
- Stable
- Long-term growth is expected
- Can still show large increases if the company innovates or develops new products
- Steady dividends
- Can be part of mutual funds
Disadvantages:
- Less growth potential than small-cap stocks
- Can still lose money if you’re not watching the value of stock
- In general, large-cap stocks are better for more risk-averse portfolios.
Small-Cap Stocks
Advantages:
- Quick growth potential
- Traditionally outpaces increases by big cap stocks
Disadvantages:
- Most mutual funds don’t allow investing in them
- They are volatile — as quickly as the value can rise, it can fall
In general, small-cap stocks are better for more risk-tolerant portfolios.
Start Investing with Help from Gorilla Trades
Knowing where to put your money can be tough, especially if you want to put your cash in stocks that see big returns.
Understanding the difference between small-cap and large-cap stocks is an important part of finding undervalued opportunities, but it’s only a small portion of the specialized knowledge you need for your investments to succeed.
Some large-cap companies can be deceptively fragile, while some small-cap companies have all of the indicators of long-term viability. With the help of a good investment team, you can see all of the options available for stretching your investment dollar.
To understand how to analyze the market and know where to put your money, sign up with Gorilla Trades! You’ll get proven, reliable market advice to get you on track. Take advantage of our free trial offer today.