 Personal Finance PowerPoint Presentation, small cap, prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia Small Cap, which you can find online. Take a look at the references, resources, continue your research from there. This by Adam Barone, updated October 20, 2021 in prior presentations. We've been looking at investment goals, strategies, tools, keeping in mind the two major categories of investments, that being the fixed income, usually the bonds, the equities, typically the common stock. Also thinking about other tools we might be using, such as mutual funds, ETFs, possibly helping us to diversify, even with less of an upfront investment than if we invested in individual stocks, individual bonds. Keeping that in mind, we're now asking, what is a small cap? A small cap is a public company whose total market value or market capitalization is about $300 million to $2 billion. The precise figures vary. So now we're looking at the companies, we're usually thinking about companies that of course are on the exchanges, so we're thinking about investing in companies, companies that have decided to be on exchanges, we're trying to classify these different companies. And now we're looking at that classification in terms of the size of the company. Once we have those classifications, we could then possibly use other tools, such as mutual funds and ETFs, to help think about investing in sections of the stock market based on size, in this case, the small cap. So small cap investors generally are looking for up and coming young companies that are growing fast, that is they're looking for the large caps of the future. So in other words, if we think about the business cycle of a company, we're looking for the companies that are kind of in this growth area here typically. When we look at these numbers, you might think, wow, $300 million to $2 billion, that seems pretty big to me. But of course, we're thinking about these publicly traded companies in comparison to other publicly traded companies. So in relation, these are types of grump companies that could have the potential for growth. So we're usually thinking about the companies that we're hoping are kind of here in their investment cycle, therefore, we would expect them to possibly not be given as much out in the form of dividends, possibly taking the money and reinvesting it, the money that they earn by doing business and purchasing more property plant and equipment so that they can grow faster. And if they were to do so, we get a return on that or we get a benefit from that by it being reflected in the market price, as opposed to more established companies, larger caps we would expect would be companies that are kind of up here, they're already well-established. We wouldn't expect them to be able to pop in terms of their growth, to have that big growth spurt, but we would expect them to be marching on nicely, helping to provide us possibly some fixed income, possibly in the form of the dividends. So understanding small caps, the cap in small cap stands for capitalization. The term in its entirety is market capitalization. This is the market's current estimate of the total dollar value of a company's outstanding shares to calculate a company's market capitalization, multiply its current share price by the number of outstanding shares. Classifications such as large cap or small cap are approximations that change over time. Furthermore, the precise definition of small cap stocks versus large cap stocks may vary among brokers. So these are general kind of classifications. When you get into the specifics into the weeds, then that line could vary a bit. So you want to have like a general understanding of these terms. And then when you're getting into, say, some more technical kind of analysis, then you might have to dive into the details where those specific lines are being drawn with regards to classifications. Just like any kind of classification type of thing, you're going to say, oh, really? So I mean, a person is an adult at what, 17? What is that? Or 18? Or 21? Isn't that an arbitrary line? How did you draw that line? We've got the general idea of, OK, yes, non-adult versus adult, but where is that line? It's not a hard and fast line, of course. It's going to be something that we're going to have to draw somewhere. So one misconception about small caps is that they are startups or brand new companies. In reality, many small cap companies are well-established businesses with strong track records and great financials. So they might have been around for quite some time and still be classified in the small cap area in terms of the size of the company. And because they are smaller, small cap shares prices have a greater chance of growth. Investing in small cap versus large cap companies. As they rule, small cap companies offer investors more room for growth, but also bring greater risk and volatility than large cap companies. You would think those big giant companies are kind of marching along or fairly well-established. You would think the smaller the size of the company, then the more potential they have to grow, but also, of course, with that potential comes risk. So a large cap offering has a market capitalization of $10 billion or higher for large cap companies such as General Electric, GE, Coca-Cola, Aggressive Growth, maybe in the rearview mirror, such companies offer investors stability and dividends but rarely fast growth. So a lot of the companies that are kind of name brands that we just understand or know often are going to be those bigger, well-established companies, we don't expect them to kind of pop off and have some big growth spurt because they're basically already have the infrastructure in there, but we do expect them to generally be marching along and therefore the dividends for them, we would expect them to be or the earnings they generate. We expect maybe they were going to give a dividend on it as opposed to, say, reinvesting it in order to facilitate more purchase of property plants and equipment to have more growth in the future. Historically, small cap stocks have outperformed large cap stocks. That said, whether smaller or larger companies perform better varies over time based on the broader economic climate. So it's been a really interesting look at people's conceptions of large companies versus small companies. For a time, people started to think something like a GE, for example, the bigger was better because you have this economy of scale concept. So it was thought that these big companies would kind of envelop everything over time and just continue to grow. And then later on, it started to say, hey, maybe that's not the way things actually work. Maybe the big companies can't do this broad range of different types of things. And so a lot of people started thinking that maybe specialization became more and more important and then this kind of dynamic continues to move forward in terms of how much benefit is just simply size and how much benefit is there to be lean and mean and what are they going to be the different kind of management strategies between the two. So for example, large cap companies dominated during the tech bubble of the 1990s as investors gravitated towards stocks such as Microsoft, Costco, and AOL Time Warner. After the bubble burst in March 2000, that was painful, small cap companies became the better performers as many of the large caps hemorrhaged value in the crash. So one advantage of investing in small cap stocks is the opportunity to beat institutional investors. Mutual funds have internal rules that restrict them from buying small cap companies. In addition, the Investment Company Act of 1940 prohibits mutual funds from owning more than 10% of a company's voting stock. So this makes it difficult for mutual funds to build a meaningful position in small cap stocks. So for example, if you think about these mutual funds, they're going to be pulling together money from a bunch of different people and then they're diversifying the portfolio by investing in different companies. Now if you're investing in really large companies, if you're a mutual fund, even though you have a lot of money to invest, it's not likely that you're going to invest so much that you really have a real heavy weighting because you're purchasing a lot of stock of these big companies. But if you're looking at smaller type of companies and you invest a large amount of money in this pooled mutual fund into one company, then you're going to have a significant portion of ownership which is going to give you a significant amount of control over what's going to happen such as the voting on the board of directors. So that's something that the market's going to be skeptical of and there's kind of regulations in terms of it. So in any case, we've got the small cap versus mid cap. Investors who want the best of both worlds might consider mid cap companies which have market capitalizations between $2 billion and $10 billion. Historically these companies can offer more stability than small cap companies yet conformed growth potential than large cap companies. So obviously the mid cap are going to be in the middle somewhere in between the two. However, for self-directed investors spending the time to surf through small caps to find a diamond in the rough can prove to be time well spent. So if you're looking at individual stocks to invest in individual stocks and you're trying to find the underlying value of the stock, you're looking for that stock that's going to have that explosive growth, then in terms of that strategy, you might for example have a portfolio of investment that's invested in mutual funds that's well diversified and you might have some other money that you want to invest in individual stocks and possibly do it like a little bit of gambling or a little bit of investing that way. In that case, then you might be looking for the types of stocks that have the potential to grow because you're looking for those stocks that could maybe have that explosive growth component and analyze the fundamentals of those stocks and you might be looking more in the small cap area or mid cap area with that kind of investment. In any case, even in our data rich world, great small cap investments fly under investor radar because they get little coverage from analysts. So in other words, when you're thinking about the people that are analyzing the different kinds of stocks, you're often thinking about people that are kind of managing these big large funds, which makes me somewhat limited to investing in some of these smaller companies so they might not hear as much about them. So you might still be able to have access to them because they are traded on the public stock exchanges. So you have the kind of trust and transparency. You get to be able to look at the financial statements and so on and so forth. But they have a little bit less focus in terms of the general kind of media scrutiny that you might get in other kind of larger funds, which could lead to some potentials possibly. So small cap stocks and the Russell 2000. The Russell 2000 is a small cap stock market index composed of the 2000 smallest companies in the Russell 3000. The index is frequently used as a benchmark for measuring the performance of small cap mutual funds. The S&P and Dow Jones indices focus on large cap stocks. So usually when we think about a type of funds, it's like the S&P or Dow Jones, those are usually focused on the large cap stocks. Those are going to be the ones that you often hear about most often in stock market channels and whatnot. Thus investors hoping to track small cap stocks performance should keep their eyes glued to the Russell 2000 or the S&P 600 or similar small cap index.