Small cap stocks are a company with a market capitalization within the range of $250 million to $ 2 billion. Over the past few decades, small cap stocks have received a lot of negativity. This is attributed to the media focus on the negative side of small cap stocks.

Basically, the media has highlighted frequently how risky these financial instruments are. While this may be from valid concerns, majority of companies that are regarded as valuable today like Wal–Mart started out as small cap stocks. Small cap stocks can be traded at the NASDAQ or the OTCBB since they have more lenient listing requirements.

In trading, it is very important not to confuse small cap stocks with penny stocks. Two major differences between small cap stocks and penny stocks have been identified.

Small cap stocks are based on market capitalization of the company and not the stock price while penny stocks are known to trade at low prices and market capitalization.

Also, small cap stocks trade higher than $5 while penny stocks trade below $5. As a result, penny stocks are regarded as high risk investments due to their lack of liquidity, low price and wide bid-ask spread. Furthermore, they don’t trade on major exchanges like NYSE and Nasdaq.

How to calculate market capitalization

Market capitalization simply refers to the market value of a company’s outstanding shares. Calculating market capitalization is quite simple. You need the following variables:

i. Current share price
ii. Number of outstanding shares

Here is the formula:

Market capitalization = (current share price multiplied by number of outstanding shares)

Let’s assume Company X has 35.65 million outstanding shares. The current price for each share is $15.15. To calculate market capitalization, you simply multiply the above variables as depicted in the example below

($15.15 X 35.65 million outstanding shares)= approx. $ 540 million.

Since the above figure is between $250 million and $2 billion, Company X is classified as a small cap company as of 2017.