What they Are Small-cap stocks are shares of smaller companies that run a bigger risk of going bankrupt while also having the potential to earn big gains in profits if they're successful.
How they Work You'll find most small-cap stocks in Canada listed on the Vancouver Stock Exchange and The Alberta Stock Exchange. The Montreal Exchange and the Toronto Stock Exchange also list a large number of small-cap stocks. While there are various definitions, small-caps are mostly companies where the value of all the shares owned by investors amounts to less than $500-million. Most small-cap stocks do not pay dividends. This is because profits are plowed back into the business for it to grow. So your return on small-cap stocks is almost always through capital appreciation, seeing the value of your shares go up. Many small-cap companies are in new or emerging industries like computer technology and medical sciences. Investors buy these if they believe the company has a good chance of developing a hot new product that will lead to big profits. Successful smaller technology companies can also be taken over by bigger companies, which can drive up the value of your shares. In Canada, many small-cap companies are junior mining and oil & gas companies. Often these companies don't have any production. Investors buy them on the chance that they will find a major deposit which will drive up the share price.
The Risks Small-cap stocks are risky because of the uncertainty over the company's future. If a junior oil & gas firm fails to find a viable oil field, then it might go out of business and you'll lose most or all of your investment.
The Rewards Just as the risks with small-cap stocks are high, so are the potential rewards if you invest in the right company. A small bio-technology firm that finds a cure for cancer could easily see its share price rocket astronomically.