What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

Small cap

A company with a relatively small market capitalization, generally between $250 million and $1 billion.

Expanded Definition

Depending on the source, some people call companies up to $2 billion "small cap." Regardless, these are the smaller fish of the economy, usually viable, just really beginning the growth phase of their life cycle. They could be an established firm ramping up or still a somewhat experimental firm, getting its feet under itself. Because they're generally at the beginning of the growth portion of their lives, these companies usually have the biggest prospects ahead of them. Identifying one that will survive and holding on while the company expands can do wonders for your portfolio. Everyone talks about finding the "next Microsoft," but this is where they exist. Finding it? That's another matter.

The Russell 2000 index contains approximately 2000 of these companies, representing approximately 10% of the total market cap of U.S. equities, which is covered by the Russell 3000 index.

In terms of risk, these companies tend to be riskier than their larger brethren in that they haven't necessarily proved themselves able to survive under many different market and economic conditions. On the other hand, small caps have tended to outperform the large caps or broad market in general, at least in recent times. A well-diversified portfolio will contain a healthy representation from the small cap universe.

Related Terms

Recent Mentions on Fool.com