Small cap (or small capitalization) is a direct reference to a particular company’s market size. This generally refers to shares of companies where market capitalization (the number of shares outstanding when multiplied by the price per share), or the overall value of all shares owned by all shareholders in the company amounts to less than $500 million dollars…give or take. However, this definition is not universal and in some cases companies with market caps of as high as $2 billion may be referred to as small cap stocks.
Investors often face more risk with small caps, but they also have the chance for significant monetary gains. Conversely, a small cap will not exhibit spectacular growth just because it’s small. It tends to grow when it does the right things, such as increasing sales and earnings, as well as by producing goods and services that customers desire.
Although small cap stocks may populate any industry, many small cap companies are in new or high-growth industries like technology, biotech, the resource sector, and most recently cannabis. Some of these companies may also lack stable revenue and earnings, but generally promise superior growth trajectory. As a result, investors are drawn to invest in them in the search for potentially higher returns.
For example, in Canada, many small-cap companies are minor mining and oil & gas companies. Often these companies are in the very early stages of exploration and development or companies without any production. Investors buy them based on the properties they own and on the chance that they will find a major deposit that will lead to future revenue and high earnings growth potential.
It is also important to note that small caps are more susceptible to volatility, simply due to their size – it takes less volume to move prices. It’s common for a small cap to fluctuate five to ten percent or more in a single trading day, something some investors simply cannot stomach.
Since there is usually a dearth of comprehensive analyst coverage on most small cap stocks, one must construct a well-informed opinion of the company with limited information.
Energy
Uranium Participation (
TSX:U)
Technology
Drone Delivery Canada (
TSXV:FLT)
Biotechnology
StageZero Life Sciences (
TSX:SZLS)
Resource
Erin Ventures Inc. (
TSXV:EV)
Cannabis
The Flowr Corporation (
TSXV: FLWR)
For more info on small cap, micro cap, and Canadian stocks, including tips on how to invest, check out the Small Cap Trending News hub on Stockhouse.
FULL DISCLOSURE: Organigram Holdings Inc. is a paid client of Stockhouse Publishing.