Apr 20, 2012

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The Differences Between Small Cap Value And Large Cap Value

Many investors fail to properly distinguish between small cap value and large cap value. However, this problem largely results from the shifting definitions of each group. Fortunately, it is not difficult for investors to learn the differences between these to types of stocks. Once an investor is familiar with these concepts, they can create an effective investment plan for their capital.

Small Cap Value Defined

The definition of small cap value has experienced dramatic changes in recent years. In particular, since the 1980′s the definition has changed to include many stocks that were previously considered to be large cap stocks. This definition experienced further changes in the late 1990′s when the price of technology stocks experienced rapid growth.

Currently, stocks are considered to have a small cap value when the total valuation of all outstanding shares and bonds falls between $300 million and $2 billion. It is important to note that this valuation must include all outstanding bonds as well as stocks. It is a common mistake to exclude the value of bonds when calculating the total capitalization of a company.

Small Cap Value Versus Large Cap Value

The difference in size between small cap and large cap companies creates different opportunities and risks for investors. In particular, small cap companies provide investors with an opportunity to earn high returns in a short period of time. This is accomplished by investing in companies that have the potential to become large cap enterprises. However, the small size of these companies creates higher levels of risk for investors. Therefore, it is important for investors to thoroughly research a company before investing in it.

Generally, large cap stocks have a value of $10 billion or more. The large size of these companies provides a different set of opportunities and risks for investors. It is generally accepted that large cap companies will provide smaller levels of growth, but that this growth will be low risk. In other words, large cap companies are believed to have a relatively stable stock price. Accordingly, the day to day value swings of stock prices will not have as large of an impact on investors that concentrate on this classification of companies. However, it is important to note that major price swings still occur. Unfortunately, when they do occur, it will take investors much longer to recover losses. This results from the slower growth rates of these companies and the high purchasing price of their stocks.

Investors have a variety of options when selecting stocks to purchase. However, it is important to understand the relationship between company capitalization levels and stock price. For investors that understand this relationship, small cap value stocks can present highly rewarding investment opportunities.

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