The classifications that follow are only approximations and they can change over time and they are not determined by any governing body. The exact definitions can vary between brokerage houses. These classifications are not carved in stone and can be subjective. Many investors and traders use these terms so they can conceptualize strategies and techniques for themselves. They also use them to help categorize their investments.

First, we need to define the phrase “cap”. This is referring to something that is called market capitalization. Market capitalization is calculated by multiplying the price of a stock by the number of shares outstanding.

Small-Cap Companies

These are typically new companies in emerging business areas. Generally speaking, their products have captured the attention of the investment market but they have yet to establish for themselves a strong market presence.

Many investors say that people should expect these types of stocks to be very volatile and that the trends can rise and fall sharply. If an investor chooses a winning stock, they can expect to make massive gains and if they choose a losing stock they can expect to make substantial losses.

Micro-Caps

Many investors say that these are the smallest and riskiest of all companies. Mid-caps can include penny stocks. Penny stocks are said to be for high rollers because they typically only offer investors substantial potential. These are the type of stocks are generally bought by investors with hopes of buying them before everyone knows how much of a great deal there will be in the future. These can be very volatile.

As the name suggests, Penny stocks can be very cheap stocks that cost under a dollar per share. Don’t think that cheap means a bargain. Many people buy these stocks thinking that prices cannot go any lower, but they can. Many people have experienced losses with micro-caps. Many of these companies may go out of business, so investors must be aware of this.

On the flip side, many investors have made huge profits by discover the companies that do manage to be growing businesses. However, many investors don’t like the odds that these types of stocks hand out. The advice by some investors is that beginner investors should avoid start out investing in this area because of the potential for extreme price fluctuation.