Small cap stocks are typically stocks with a small market capitalization of around 500 million US dollars and 1 billion US dollars, but could sometimes be companies that have much less market capitalization. Some have market capitalizations less than 50 million US dollars. Some of these small cap stocks are companies that have a high potential for growth.

With a small market capitalization, low initial public offering price, and often low trading price, these stocks are often pejoratively called penny stocks.

The small cap stocks that are worth investing can be distinguished from penny stocks through several criteria. Typically, the better small cap stocks are companies with known operations, give out relevant financial disclosures, and are generally considered worthwhile investments despite their small capitalizations.

Small cap stocks are traded in many stock exchanges, but a lot can be found in the Over the Counter Bulletin Board (OTCBB) and National Association of Security Dealers Automated Quotations (NASDAQ) where listing requirements are a little bit more achievable compared to getting listed at the New York Stock Exchange and the American Stock Exchange.

Small cap stocks may also be quoted in the Pink Sheets, but since the parent companies are willing to fulfill the bulletin board and/or stock exchange registration requirements, the companies get listed in the proper exchanges.

Such small cap stocks in proper exchanges, because of their listing in stock exchanges as opposed to just being in the Pink Sheets, are much less like to be thinly traded compared to what are considered penny stocks. Small cap stocks generally have more liquidity compared to penny stocks.

The primary benefit for making investments in small cap stocks is that these are stocks of companies that have very good potential for growth. Many large successful companies were startups that had small market capitalization in their stock exchanges.

A couple of examples are Microsoft, which trades at NASDAQ at around $23 to $37 per share for the past year and has a current market capitalization of $240 billion and Wal-Mart, which trades at around $42 to $62 at the New York Stock Exchange for the past year and has a current market capitalization of $234 billion.

Both started as what we now know as small cap stocks. These companies both started small, filed their respective registrations, went to the stock market to raise more capital to expand their business, and then ran their companies well so that the stock prices would appreciate.

Small cap stocks are generally shares of startup companies seeking to raise cash for growth and expansion. The companies have taken the time and the investment of being listed in stock exchanges, and are generally confident in their products and/or services that they would willingly sell part of the company in order to create a better organization.

The initial capitalization and share prices of the small cap stocks are often low, but have big potential for increase in value. They are distinguished from similarly priced and capitalized penny stocks in that company information is verifiable due to relevant regulator and stock exchange registration.