The word "Cap" is short for Market Capitalization. Market Capitalization is simply the amount of shares a company has in their float, multiplied by their current stock price. This number is supposed to give you an idea of a company's overall value, and size.
There's small caps, mid caps, and big caps. All they're referring to, is how big and established the company is. Most people who own, and trade stocks, use mostly big caps to do so. These companies are established. They have been around for years. They have name recognition. They have an earnings history. They have a chart you can study. They have big name CEOs.
Big caps are the easiest, and safest stocks to trade, for all the factors I just listed. For a company like IBM to lose half of their share value would be completely shocking. It would take a market crash at this point, or a complete business catastrophe, to ever get back to that level, and it the decline could take weeks. By contrast, a small cap could lose half it's value in a day, pretty easily.
With small caps, a lot of time we're taking about companies who aren't currently making money. You have to be extremely careful with companies that aren't making money. If they aren't making money, they are burning, or spending it. At some point, if that little company can't turn a profit, it will need more funds to survive. They can add debt, if a lender is willing to lend them money, they can sell assets, or they can attempt to release brand new shares into the market.
Any shares issued by a company after they've had their inital public offering (IPO), are called a "Secondary". When this happens, most of the time, it's a bad thing. As more shares are added to the float, your current shares become less valuable, because there are more of them distributed. The company is in a sense, selling more pieces of itself into the market, and they will recieve money back for each piece. We'll talk about "Dilution" more in a future post.
Understand, there is more risk in small caps, but there is also more profit to be had. You would be surprised how many small and mid caps, go virtually unnoticed, even if they are doing a great job. Quality small businesses do go largely unnoticed in this game. Big money likes established names, and predictable earnings. Much of the time, they completely ignore these smaller companies, even knowing they are good, and will wait until they grow more. Basically you will find gems out there, and it will be easier than you think, because these small companies just don't get exposure.
Most people when they start this game make the huge mistake of allocating a lot of funds, to small cap companies. The market offers all kinds of business' from very safe, to very risky. I'd prefer the first stock you sink some real money into, is a reliable big cap. You'll have more information to work with, and the stock will have less volatility. You'll have a trust that this company will be around for a long time.
There's a huge difference between buying McDonalds, a big cap, with great earnings viability, and a dividend, and a small cap Chinese semi-conductor company, with no earnings, that trades on the Chinese stock exchange.
Let me teach you "Averaging Up And Down"...
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