A:

It is a smart idea to study the movements of a broad-based index of companies before making an investment decision. Specifically, you should look at an index made up of companies whose attributes resemble those of the securities found in your own portfolio. There are many indices and mutual funds that are comprised of small-cap stocks - companies with a market cap between $300 million and $2 billion. Let's look at the two most popular ones.

Standard & Poor's 600 - This index is likely the most popular index used by traders to gauge the direction of any given small-cap stock. It is comprised of 600 small-cap stocks and is generally less volatile than other small-cap indices because of the strict standards that companies must meet in order to be included in the index.

Russell 2000 - This index gives traders a comprehensive picture of the small-cap segment of the U.S. markets. It is composed of the smallest 2,000 companies that make up the broader Russell 3000 - an index developed to gauge the performance of the majority of the companies listed in the U.S. markets. Many traders like using the Russell 2000 because it factors in a larger number of companies than the S&P 600, which means it may provide a more accurate depiction of the future direction of small-cap stocks.

If an investor is familiar with either of these indices, he or she should have a good grasp of the general trend of the majority of U.S-based small-cap stocks. It should be noted that it will become harder to profit from a small-cap stock when the general trend of either of the above indices is down.

To learn more, see Introduction To Small Caps, What Is A Small Cap? and Market Capitalization Defined.

RELATED FAQS
  1. How do the risks of large cap stocks differ from the risks of small cap stocks?

    Understand the important differences between large- and small-cap companies that make small-cap firms a more risky equity ... Read Answer >>
  2. What should I use as a benchmark for my small-cap stock portfolio?

    When creating a stock portfolio, it is important to have a benchmark against which you can compare your returns. Comparing ... Read Answer >>
  3. Does investing in small cap stocks have advantages over investing in big cap stocks?

    Learn about the advantages of investing in small-cap stocks, and find out why some investors buy shares in small-cap rather ... Read Answer >>
  4. How risky are small cap stocks?

    Learn about small-cap stocks and how they are considered riskier than large-cap stocks. Mostly, it is due to a smaller balance ... Read Answer >>
  5. What is the difference between a penny stock and a small cap stock?

    Learn about penny stocks and small-cap stocks, how stocks are classified as these types, and the difference between penny ... Read Answer >>
  6. What are some of the best small cap index funds?

    Learn about the best small-cap index funds, such as the iShares Russell 2000, IWM due to its low costs; liquidity; and diversification. Read Answer >>
Related Articles
  1. Mutual Funds & ETFs

    5 Best US Small-Cap Index Mutual Funds

    Read about different small-cap mutual funds that are available for investors. Learn about how the small-cap indexes have higher volatility.
  2. Mutual Funds & ETFs

    IWM vs. VTWO: Comparing U.S. Small-Cap ETFs

    Find out how two of the largest small-cap exchange-traded funds, the iShares Russell 2000 and the Vanguard Small-Cap ETF, compare with each other.
  3. Investing Basics

    How to Make Small-Caps Win for Your Portfolio

    Small-cap stocks can offer generous returns, but you need to know how to find the right ones. Here's a little help.
  4. Stock Analysis

    Small-Caps and Dividends: Perfect Together

    For investors, small-caps shouldn’t be just about growth. They can be powerful income tools, as well.
  5. Stock Analysis

    Playing Penny Stock-Like ETFs

    While there are no penny stock ETFs or mutual funds, a shrewd investor can pick from a number of small-cap and micro-cap equity ETFs for a similar effect.
  6. Stock Analysis

    Playing Small-Caps In This Market? The Key Is Dividends

    Small-cap stocks have taken a beating at the hands of jittery investors, but there are opportunities if you focus on dividends.
  7. Mutual Funds & ETFs

    The Top 3 Small Cap ETFs for 2016 (VBR, DES)

    Obtain detailed information on three of the most promising small-cap exchange traded funds (ETFs) that could outperform for investors in 2016.
  8. Fundamental Analysis

    Is it Wise to Diversify with Small-Caps?

    Historically, it's always been a good idea to add small-caps to your portfolio. But doing so right now will require more focus and attention.
  9. Mutual Funds & ETFs

    Valuing Small-Cap Stocks

    When done right, small-cap investing can improve the performance of your portfolio without adding a great degree of risk.
  10. Mutual Funds & ETFs

    The 5 Best US Small Cap Value Index Mutual Funds

    Find out which index mutual funds do the best at investing in small-cap value stocks for higher potential returns at the lowest cost.
RELATED TERMS
  1. Russell 2000 Index

    An index measuring the performance approximately 2,000 small-cap ...
  2. S&P 600

    An index of small-cap stocks managed by Standard and Poor's. ...
  3. Russell Small Cap Completeness Index

    A capitalization weighted index composed of all of the Russell ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the ...
  5. Russell 1000 Index

    An index of approximately 1,000 of the largest companies in the ...
  6. Russell Top 200 Index

    A market capitalization weighted index of the largest 200 companies ...
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center