What Are Small-Cap Stocks?
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What Are Small-Cap Stocks?
Stocks of small companies that have the potential to grow rapidly are considered small-cap stocks.
Things To Know
- Small-cap stocks are usually growth-oriented.
- Small-cap stocks are often volatile.
Characteristics of small-cap stocks
Many of these companies are relatively new. How they will behave in the market is often difficult to predict. Because of their small size, growth spurts can affect their prices and earnings dramatically. On the other hand, they tend to be volatile and may decline dramatically.
Most initial public offerings are for small-cap companies. Most small-cap stocks are oriented toward growth. Growth and aggressive-growth mutual funds often look for small-cap companies for their portfolios. Because they look to grow rapidly, small-cap companies are likely to forgo paying dividends to investors so that profits can be reinvested for future potential growth.
Who chooses small-cap stocks?
Small-cap stocks are popular among investors who are looking for growth, who do not need current dividends, and who can tolerate price volatility. If successful, these investments can generate significant gains.
Small-cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small-cap market may adversely affect the value of these investments.
