SMALL-CAP VS. LARGE-CAP STOCKS (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

Nearly everyone has heard about small, growing companies with skyrocketing stock prices. Many investors are drawn to these success stories and have put a large percentage of their investment dollars into small-company stocks. Is this a wise investment strategy?

Before loading up on small-company stocks, you should have a clear idea of how they differ from those of larger companies.

For investment purposes, a company's size is defined by its market capitalization its current stock price multiplied by the number of shares outstanding. Small-capitalization ("small-cap") stocks typically have market capitalizations of less than $1 billion. That might seem like a lot of money to be considered small, but large-capitalization ("large-cap") companies such as Microsoft, Coca-Cola and General Electric have market capitalizations of more than $100 billion.

Investors are attracted to smaller companies because they often increase earnings more rapidly than larger companies, whose sheer size prevents them from growing as fast. And there have been periods in which small-caps significantly outperformed larger companies.

In recent years, though, it's been the large-caps that have been the stars. The current, record-setting bull market has been driven mostly by big, blue-chip companies, while small-caps have lagged. This doesn't mean that small-caps won't again have their day in the sun. But if you're considering investing in smaller stocks, you need to keep in mind that they also carry greater investment risk than larger companies.

Why? For one thing, small-cap stocks are more difficult to evaluate than larger ones. Even financial professionals may have a hard time discerning the prospects for small companies, especially those that are relatively new. Without this knowledge, you have less solid ground on which to base your investment decisions. Furthermore, when the stock market goes into a slump, small-cap stocks tend to fall harder.

Do these risk factors mean that you should avoid small-cap stocks entirely? No. One of the most basic rules of investing states that the greater the risk, the greater the potential reward. In other words, your small-caps could provide you with some valuable growth.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.