Definition: Small-Capitalization (a.k.a. small-cap) stocks are equity security investments with small relative market capitalization, or market cap, which is measured by the price of a stock multiplied by the number of shares outstanding.
For example, if XYZ company has 100 million shares of stock outstanding and the share price is $10 per share, the market cap is $1 billion (100 million x 10).
Morningstar defines the small-cap category of mutual funds as "the bottom 10% of the capitalization of the U.S. equity market." Generally, small-cap stock funds invest in companies with market caps below $2 billion.
For most investors, an appropriate small-cap stock allocation for a diversified portfolio of mutual funds represents between 5% and 20% of the total amount invested. For the best and broadest exposure to small-cap stocks, investors may consider investing in an index fund that tracks the Russell 2000 Index.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.