To be fair, it doesn’t count what type of stocks we invest in. Common stock with small capitalization (defined as having market capitalization of $500 Million or less) and big capitalization (market capitalization of $5 Billion or more) can pay you out sized returns provided that you bought it under fair value. But if you were only paid one choice, which one would you prefer?
Small cap common stock historically returned a higher rate of return than its big cap counterpart. All home names that you are familiar with were a small cap stock. Microsoft, Dell, IBM, Johnson & Johnson were all small companies. When a company is small, a few millions of additional sales may contribute to explosive growth in earning. Therefore, the reward of investing in small cap stock is high. How about the risk? The risk is plenty. 90 % of all new business will fail during the first five years of performance. The statistics for the number of small cap public companies that fail are not widely available. But, my guess is it may involve about half of the publicly traded companies.
Big cap stock is a bigger and steadier company. For some, bringing in one billion dollar of sales may not proceed the gain meter. Therefore, earning growth has slowed down and the potential return is depleted than small cap investing. The risk in investing in big cap stocks however is low. Sure, some companies fail from time to time. Polaroid, Enron and World com came to mind. But for most occasions, big cap stocks can turn the ship around when they are in problem.
The phrase ‘they are too big to fail′ comes to mind. IBM, Altria, Best buy, General Electric, Walmart, Chevron have its ups and downs. All of them recover. Some of them were acquired later on. Therefore, the peril of failing is lower with these companies. Perhaps, it is as low as 10 – 20 %.
Now, it is your decisiveness time. Which one do you opt? I am more comfortable in investing in big cap stock. I still had plenty of investing time but big cap stock helps me sleep better. It matters more to me than higher potential return. The respectable solution of course is to mix in your portfolio with both big cap and small cap common stocks. However, do not over diversify to the point where your return will be mediocre no matter what your stock prices do.
Are you searching the sure shot tips for investing in Small Cap & Big Cap than your search is over now just search the best tips on nifty sure shot and also search tips for safe stock trading on hot stock tips
{ 0 comments… add one now }
Leave a Comment