- So you want to invest in small cap stocks,
but you're not so sure what they are.
This video is all about small cap stocks,
what they are,
the historical performance of them
and how to invest in them.
(Air whooshing)
Hey guys, welcome back to The College Investor.
The place for investing
and personal finance for millennials,
we are diving into small cap stocks exclusively.
So small cap stocks
are basically made up of small companies.
And the word cap is short for capitalization.
There are plenty of different stock sizes
including small, mid and large cap stocks.
So small cap stocks are companies with market caps
between 300 million and $2 billion.
so you might be wondering about this market capitalization
and how it's determined.
Well, market capitalization is calculated
by the number of outstanding shares that accompany has,
multiplied by the price of that share.
So for example,
if a company has 100 million shares outstanding
and the price per shares is $5
and then that company's market capitalization
is $500 million.
So think of small cap stocks as the small yet mighty.
They're more volatile than large cap stocks.
And they typically perform better than large cap stocks.
So think bigger risk, bigger reward with small cap stocks.
There are at times small cap stocks out there
including Southwestern Energy company
and California Resources Corporation.
So I actually wanted to take you inside
of the Vanguard small cap index fund,
just to give you an idea of
what one of these funds actually looks like.
So here's the Vanguard Small-Cap Index Fund.
The ticker code is VSMAX
and it says that this is an index fund
that provides broad exposure to the small capitalization
U.S. equity market.
So it tracks index of small sized companies
and its focus is on the small-cap arena.
Then we'll go over to the price and performance here.
And if we look at the average annual returns,
we can see that this particular small cap fund
actually tracked 11.4% in annual returns
of a 10 year span.
And since its inception in 2000
it has had an annual return of eight and a half percent.
Now small cap funds can actually be made up of a variety of
different companies that do business in different markets.
So think healthcare, utilities, transportation,
consumer goods and services,
just about any type of industry
can actually go into a small cap fund.
Now let's talk about the performance of small cap stocks.
I mentioned that they're more risky
than large cap companies,
but there could be a lot of reward and benefit to that too.
So during a recovery period in the market,
small cap stocks tend to perform better
than large cap companies because as I mentioned before,
they can move quicker.
Now when large cap companies are looking to raise money,
they'll issue bonds to raise capital.
Small cap companies operate in a different way.
They'll actually sell stocks and in turn
give up a portion of their equity in order to raise capital.
Now let me show you this chart that compares
the S & P 500 against two small cap indices.
Okay, so this chart shows the S & P 500
and then the S & P 600 and the Russell 2000 index.
Those indices actually track small cap companies
and you can see that they really do outperform
the S & P 500.
But with big wins there can also be big falls.
So just know that when you're getting into small cap funds
that the rollercoaster ride is a very real thing.
All right, so there's a few ways that you can invest
in small cap stocks.
You can buy small cap shares and funds ETFs.
Those are electronically traded funds,
stocks, small cap index funds,
much like the one that I was showing you with Vanguard
and mixed index funds with small cap stocks in them,
so it could be a range of small cap, large cap, mid cap.
They're all mixed in together.
Investing in small cap stocks can be rewarding
and who knows? You may have the chance to discover
the next Microsoft Apple or Google
with small cap stocks and with any stocks really,
be sure to do your research.
If you find a stock that's particularly interesting
or you read something in the news,
look it up, look up the historical performance
of that stock.
If it's an index fund
that blends a bunch of small cap stocks
and companies together, find out what those companies are.
The more knowledgeable you can be
about these stocks up front,
the better that you'll understand your potential growth.
And as always, for more investing tips,
be sure to visit the college investor.com.