Simply put, the small cap market is huge. Nearly 8 out of 10 companies that publicly trade in the United States have a market capitalization of less than $500 million. A surprising 40% of the businesses that trade on Nasdaq have a market capitalization of less than $250 million.
Yet these companies get very little if any analyst research coverage on Wall Street. You may have 52 analysts covering a $468 billion company like Apple, but practically no one covering the small cap company. The investment news media consisting of broadcasts media like CNBC or the magazines and financial newspapers also rarely mention small caps. As a result, the small cap’s stock price rarely reflects the company’s future prospects.
Yet small companies are the true leaders of innovation and creativity. Large companies are bureaucratic monstrosities. Think of the film Office Space where computer engineers stuck in cubicles feel their creativity is stifled while they are focused on pleasing middle management writing Testing Procedure Specification (TPS) reports. Large corporations have become totalitarian work environments where the CEOs are acting as dictators looking over Stalinesque bureaucracies and even their brightest staff members feel as if they are merely renting themselves to the company for a living. The large organizational hierarchies of big cap companies are slow in making decisions and require sticking to established stagnant procedures. Startups require innovative entrepreneurs, and that typically isn’t in a job description for a large company. An innovative entrepreneur would most likely be deemed a threat by corporate middle management.
Small cap companies are hampered by little if any bureaucracy and this leads to rapid decision making, fast adaptability to quick changing markets, and a willingness to take on the risk of new ideas. Large companies sometimes throw large amounts of money to innovate and get nowhere due to ineffective internal communication within their own departments. Clear communication among internal staff and a lack of funds triggers small companies to come up with different, unique, solutions to solve the problems that lead to innovations.
Small cap entrepreneurs are the visionary business people that do market research, create business plans, seek out investors and financing, and then strive to create products and services that utilize a country’s resources. They are the true job creators, and not the management of large corporations that seek to enhance profits by off-shoring labor or replacing people with automation. They are the value waiting to be unlocked in the small cap market.
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