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Small - Cap Stocks
Most small-cap companies are also small companies in terms of revenues, but there are
exceptions. A large company whose stock price has plummeted may land in the small-cap
category, and a small company whose stock price has skyrocketed may, in fact, be a
large-cap stock.
A small company with a promising proprietary product or service or one operating in a
dynamic field can have far greater potential for rapid earnings growth than a huge company.
Small companies with streamlined management structures should be m++
ore flexible than large ones and better able to seize opportunities or respond to market
changes. In addition, their slimmer overhead should enable a larger percentage of rising
revenues to flow through to earnings—and more quickly—than is usually true of a larger
company.
Small companies face some disadvantages, too. They may have a harder time securing
outside financing, if necessary, than a larger company. Their managements may be creative
but relatively inexperienced in the rough-and-tumble of the marketplace. And just as their
earnings quickly reflect rising revenues, they will likewise be more sensitive to a setback in
A third factor contributing to volatility can be a lack of information, especially in the science
and technology area. It is difficult for most investors to interpret the long-run effect of
news—discoveries, lawsuits, government regulations, for example—on a highly specialized
electronics or biotechnology company. A common reaction to news perceived as potentially
negative is to sell the stock. This lowers its price but may create a buying opportunity for
those with more in-depth knowledge of the situation. At the same time, positive
developments may go generally unrecognized, again creating investment opportunities for
someone following the company closely
First, the small-company universe includes many rapidly growing companies whose stock
prices are strongly influenced by earnings expectations. Unexpected earnings gains (or
predictions of gains) can send a stock's price soaring, at least temporarily. But when a
company's earnings hit a snag or appear to lose momentum, investors may quickly desert the
stock because the basic reason for owning it is called into question. There is seldom any
dividend to cushion the impact of a price decline since most smaller companies use their
earnings to finance their growth
Word Count: 366
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