What is a Small Cap Stock?

Despite what the moniker implies, small cap stocks are the ticket to big returns in today’s stock market environment.

A small cap stock is one that has a market cap of $300 million to $2 billion. That’s the total value of the company’s shares. These stocks may be in biotech or cloud computing, but don’t discount traditional businesses.

A lot of very successful small cap investments come from very basic business models. The corner convenience store, the healthy food manufacturer, the high-volume concrete company, the water refill service … a lot of money can be made by keeping things simple, establishing large positions in small companies with proven business models, and being patient as they grow and/or are bought out by a larger competitor who can improve its own business by a rapid-growth tuck-in acquisition.

And yes, these stocks have just as much, if not more, potential as larger businesses. In fact, the average annual return in the S&P 600 Small-Cap Index over the past 20 years is 10.5%, compared to a 7.9% annual return in the S&P 500 during that time. The numbers don’t lie: these lesser-known stocks are, historically, better performers than large-cap stocks.

Investing in a small cap stock is a good way to earn huge returns. And the smallest of these companies often have the most potential for growth. It’s worth noting, however, that they also carry plenty of risk.

Anytime you buy shares of a small, little-known company, there are a bevy of unknowns. It’s impossible to take the risk completely out of small-cap stock investing. But there are ways to minimize those risks without sacrificing potential profits.

To learn more and start expanding your investing options, download our FREE report, 3 Small-Cap Stocks That Can Work Now Despite COVID-19, right now.