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Introduction

Penny stocks are companies that are extremely new or extremely small and are so small that their stocks can often go for less than a penny a share. At the other end of the spectrum is the cream of the crop in the blue chip stocks. It is quite possible for one of the blue chip shares to actually be worth more than the entire share price for a particular penny stock. While both of these companies have public trading going on at regular intervals and both of them are companies that you can utilize to trade your way to success, neither of these two stock types tell the entire stock market story and indeed even both of them together still leave a lot of companies out.

Small Cap Companies

There are many companies out there that are relatively unknown in their field and operate in relative obscurity while the lion’s share of the attention is grabbed by the larger and more successful companies. While people in the industry will know about these companies (unlike with many penny stock companies), the general public will likely not have heard of them. These companies have a smaller market capitalization that is usually under a billion dollars and it is these companies that are known as small cap companies.

The essence of the smaller cap companies is that they offer many of the advantages of the blue chip stocks while at the same time offering many of the advantages of the penny stocks as well. This tends to make them very attractive to amateur and first time investors and while small cap stock is a possibility for a beginner’s investment, at the same time understanding something about the stock type before plunging ahead is a very good idea.

Advantages of Small Cap Stock

The blue chip side of the advantages for the small cap stock is that while the companies are usually smaller and have a smaller amount of funding available, at the same time they are close to being established and probably will not be going anywhere if they manage to get their foot in the market. These advantages are important when they are considered in the context of penny stocks because the small cap stock will provide slightly more security and thus a slightly lower risk than the penny stock.

As for the penny stock side of the equation, small cap stock is also priced quite cheaply. It is not uncommon to find share prices at just a few dollars per share and this in turn means that even if you only have a few hundred dollars to invest, you can get a fair number of shares in a small cap company. If you do your research and pick a good small cap company it is not uncommon that you are able to double your investment because of the extreme growth rate that many companies have when they first get into their particular industry of business.

Disadvantages of Small Cap Stock

While small cap stock does have those advantages, investing in them is by no means a walk in the park. Small cap stock is still unreliable at best, meaning that once again you are going to be in a higher risk for a higher reward situation. The slightly lower risk of this situation is what makes it acceptable for beginners as well as the fact that like with penny stocks the amount you lose does not have to be large. However, if the company self-destructs before getting to the big time, is forced out of business or is purchased by competitors, you could see your investment destroyed instantaneously. Investment in small cap stock is a cautious game and one that you must not play until armed with as much information as you can possibly get.