Capitalisation - Where to invest?

Hi again!

What is capitalisation, or cap?  Well, it's the price per share multiplied by the number of shares.

What does it mean?  Well, it represents the size of the business on the stock market.  However, don't assume that a high share price means a large cap, or a small share price means a small cap.  It's also dependent upon the number of shares being traded on the stock market at that time.  It is easily possibly to have a low shared price and billions of shares, and thus be a large 
cap company.  In the same way it is also possible to have a high share price, and a relatively few 
number of shares and be a small or micro cap company.

It seems that companies who for example fall out of favour to the point where their cap falls out of being large cap, and medium cap, and fall into small cap, or micro cap sized company.  This can happen for a number of reasons, as with value investing it could be that specualtors' emotions have undervalued the stock for one reason or another, which is an opportunity.  It however, could also mean that the company is no longer trading effectively.

If as a trader you get the opportunity to buy a small or micro cap company that is seriously undervalued and has probably dropped off of the analysts radar, you can potentially make higher gains than you would a medium or large cap company.  There is much research data around to support this, don't just take my word for it.  This extra gain is due to the margin of safety inherent in the undervaluing of the stock, meaning the value of the company appears to be much higher than the share price of 
the company.

On the other hand, a large cap stock appears to be a great place to put money, so that it makes a reasonably consistent return, it's unlikely to be an amazing return, but it will likely retain your profits reliably into the future.

It's interesting to note how the stock market views, or more precisely doesn't view these smaller cap companies, and how there is an inherent opportunity, should you analyse and pick the stocks with the best company fundamentals.  It seems most analysts look at the large cap stocks, the blue chip stocks, as they're often less volatile, and therefore the lower risk means a lowered potential return.