Let’s begin with a simple definition. In public markets, you’ll often hear terms like “blue chip” or “small cap.” The “cap” is an abbreviation of the word “capitalization.” Thus, a small cap is a public company with low market capitalization. These might be newer companies, companies with a limited TAM or smaller players in an industry.

When a company increases their market cap they might become mid caps and eventually large caps – or “blue chips” as they’re often referred to as. In the US, a company is considered a small cap when their market value is between $500m and $2bn. Up until the $500m mark, we use the terms “micro cap” and “nano cap.”

There is, however, no formal guidelines for when a company is characterized as “small” or “large.” In the Nordics, most companies would be considered small caps if they were listed in the US. In our definition, we consider companies with a market cap from $1m to $300m as “small caps”. As of today, this constitutes more than 1000 companies.

Characterization of a small cap

Nordicsmallcap.com is, as the name suggests, all about small caps. But for us, small caps are just a concept. What we really aim to do is to find good companies before anyone else. It just happens that these are easier to find in the small cap universe. Some of the characteristics of the companies our members look at might be:

-No analyst coverage
-No or limited media coverage
-Often illiquid
-No or low institutional ownership
-Limited information on the company

In simple terms: We try to find overlooked companies.

What kind of companies do we talk about?

There might be several reasons for a company to fall into our universe. Often, there are good reasons for a company to have a smaller market cap. We’ve already mentioned a few, but it might be a good idea to expand on it:

-Smaller players in an industry
-New companies
-Companies in an industry with a limited TAM
-Unprofitable companies
-Companies that have fallen from grace
-Turnaround cases
-Family owned

Whether you’re looking at small caps or large caps, you will find good and bad companies. However, many consider small caps to be especially risky. You might have heard of the term “pennystocks”, and you probably have been warned against them. Pennystocks are often, if not always, small cap stocks. Equally, they trade on less regulated marketplaces such as Oslo Axess – which is also considered riskier than companies on the main stock exchanges.

Many refrain from fishing in this pond due to the risks involved. Institutions, usually, aren’t interested in small caps due to the difficulties of getting a decent position. The daily ups and downs rarely make for a good story, so the public attention is limited. For investment banks and analysts, it’s rarely worth dedicating time and resources following companies that their clients would struggle to buy.

But this makes small caps a great hunting ground for long-term oriented investors who are willing to put in the effort to do the research, have the patience to wait and are oblivious to volatility.

A community of small cap investors

At Nordicsmallcap.com our members share ideas and research, participate in engaging investing-discussions and enhance their investing skills. By being a part of our community, you’ll get the benefit of leveraging other people’s research to get a better deal flow, get feedback on your own research and help others excel.