We know that the vast majority of the money in the market is invested in companies with large amount of capital. These large cap corporations are the first thing that many individual investors and mutual fund managers look for. Yes, they are big players in the market for a reason. If you watch mutual funds though, you may have noticed that most of the funds in a particular market sector seem to perform about the same. In fact, a few beat the market, and a few are outperformed by the market but there is almost no deviation from the average market returns. It seems like anybody could simply pick the largest companies on the stock exchange, buy a bunch of shares and hang on for the ride. Some of us would actually like to outperform the market.
You can’t find larger companies than the ones that the big mutual funds do not invest in. The only way to go is smaller. If you follow this logic, the only way to beat the market is to get some exposure to the small cap market. It is full of companies that have massive growth potential, and it doesn’t carry the same kind of risk that getting into something like penny stocks would have. With a small cap company they will not be cornering the market in what they do or with what they are selling. The point is that they could at some point in the future and it is this growth that will drive up the stock price. Dividends are nice, and many of the large companies pay them, but the real money to be made in the stock market is to see an increase in the price of shares.
Almost everyone in the market is looking at the large cap stock companies. For this reason you will not find many deals. As soon as there is some innovation, new product offering or technological breakthrough it will be widely known and investors will rush in to capitalize. The same cannot be said for small caps and this is a good thing. Some of them can fly under the radar and in those cases they will hold an excellent value proposition. You can also see that there may be skepticism about the potential good fortunes of a small cap company. Because they have often not been tested in the marketplace like their larger cousins, investors are less likely to trust that the moves they make are the right ones.
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