small cap investment & finance definition
Short
for small capitalization stocks, which
are stocks with a small total market value. Small cap companies are small
compared to other public companies. The market value of a small-cap company
ranges from $300 million to $1 billion, although that definition can vary
widely depending on who is using the term. Companies with a market
capitalization under $300 million are called micro
cap companies.
See small cap in Wall Street Words
- Of or relating to the common stock of a relatively small firm having little equity and few shares of common stock outstanding. Small-caps tend to be subject to large price fluctuations; therefore, the potential for short-term gains and losses is great.
- Of or relating to mutual funds that invest in the stock of small-cap companies. See also microcap.
How can I determine whether a small-cap stock is reasonably valued?
A reasonably valued small-cap stock should be a company that has the potential to increase its earnings at a rate higher than the general growth of the economy. Because small-cap stocks generally have unusually high price-earnings ratios, the investor needs to look at each stock individually and compare its price-earnings ratios with the average price-earnings ratio of the appropriate small-cap stock index, such as the Russell 2000.
George Riles, First Vice President and Resident Manager, Merrill Lynch, Albany, GA
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