A Small Cap Opportunity?

Small cap investments don't get much attention, but they may have a place in your portfolio.

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Many experts on Wall Street and in the media don’t pay much attention to small cap stocks. They’re smaller, more obscure companies, they don’t usually involve large sums of money, and they aren’t as glamorous as the bigger caps available to invest in today.

But some experts have argued that the lack of attention to small caps is unwarranted. Many argue that small caps offer much more opportunity for growth. Along with increased opportunity for growth comes increased opportunity for loss. When deciding if small caps might have a place in your portfolio consider both sides.

Small cap stocks are a nickname for stocks of companies that typically have a small market capitalization. (Usually somewhere between $2 million and $300 million. Definitions vary.) Market capitalization, simply put, is the price of the company’s stock multiplied by the number of shares outstanding. It’s basically the value the market places on a company.

Large caps are more glamorous to some experts because they are perceived to be more reliable and safe. The prevailing assumption is blue chip stocks are strong and steady. But as Enron and others have shown, that isn’t always the case. Risk exists throughout the market, and with reduced risk, comes reduced growth. It may not have taken a stock like Wal-Mart long to double in growth, but for them to do so now, as a large cap stock, would be almost unheard of. In fact, Wal-Mart itself started as a small cap stock before becoming the world’s biggest retailer. A small cap’s biggest advantage and disadvantage is its potential.

Investing in small caps means you should be even more cautious. Any money you invest in small caps should be money you’re prepared to expose to a higher degree of risk. Small companies often have narrower markets and limited financial resources, so investments in these stocks present more risk than investments in those of larger, more established companies Small cap stocks are also more difficult to research and choose precisely because of their obscurity. This means more time and effort must be taken by you and
your financial professional.

This is where a niche opens up for individual investors. Several small cap investments do exist and offer opportunities for investment. If an investor gets in at the ground level, the opportunity for growth exists if larger, institutional investors later pick the same stock and buy a great deal of shares.

Wall Street and the media may not pay attention to small cap stocks, but that doesn’t mean they aren’t a possible addition to your portfolio. Because of their relative obscurity in the markets today, they allow not only a great deal of growth but also an increased risk. In the end though, Wall Street and the media aren’t in charge of your portfolio. You and a financial professional are. Every investment decision you make should be carefully planned with a professional to make certain that it has the proper place in your portfolio. Now you have one more option to consider as you attempt to reach your financial goals.