The “cap” abbreviation in the term small cap refers to market capitalization, or its total shareholder value.
More Info: Although the definition of a small market capitalization varies from brokerage to brokerage, the generally agreed upon range is between $300 million and $2 billion.
There are a number of different stock market sub-indexes that list small cap stocks: the MSCI US Small Cap 1750, the Standard & Poor’s (S&P) Smallcap 600 and the Russell 2000. In each case, the average market cap size of the companies listed is different. For MSCI, the average is $1.3 million; for S&P, it is $938 million; and for Russell, it is $857 million. These averages fluctuate depending on the daily overall state of the stock markets.
The Most Influential Small Cap Listings
One of the most influential listings of small cap companies appears each fall, courtesy of Forbes Magazine’s Top 100 Small Companies ranking. In the fall of 2010, the publication focused on companies with sales of $1 billion or more, and a minimum stock price of five dollars. As soon as the listing comes out, other small cap watchers filter the information through their various evaluation and information systems, re-ranking the Forbes picks in order of how they see the stocks likely to perform over the next 12 months. The disparity between a Forbes small company ranking and a handicapper’s final placement of that same firm’s stock can be substantial. For example, on the fall 2010 compilation, Pre-Paid Legal Services is ranked 78th on the Forbes list. But after running it through filters related to earnings and adjusted gross income, one analyst placed that same company as the second best bet out of the 100 Forbes ranked companies in terms of immediate, likely small cap stock performance. As with micro, mid and large cap companies, there is a limitless number of formulas being applied by investors to try and gain the edge.
Investopedia.com – Small Cap, Retrieved November 9, 2010 from http://www.investopedia.com/terms/s/small-cap.asp
Forbes.com – “Size Matters to Indexers”, November 4, 2010, Retrieved November 8, 2010 from http://blogs.forbes.com/rickferri/2010/11/04/size-matters-when-indexing/?boxes=Homepagechannels
The Street – “Re-Ranking the Forbes Best Small Caps List”, November 9, 2010, Retrieved November 9, 2010 from http://www.thestreet.com/story/10915610/1/re-ranking-the-forbes-best-small-caps-list.html