Russell 2000 Index – EXPLAINED – What, Why, Where, How?
Small cap stocks, Penny stocks and pink sheets are the high adrenaline stocks investors play games in.
They are generally the cheaper, highly volatile, some are illiquid and can fluctuate 50% – 1,000% a day.
From the Wolf of Wallstreet glamorizing the potential returns for investors to your every day salesman broker trying to sell you the next winner.
But what is the Russell 2000 Index and what should we know about it?
I’m going to sum it up a bit of information about how it works and important facts you need to know
WHAT IS IT?
The Russell 2000 Index (listed in 1984) is a stock market index that tracks the performance of small-cap publicly traded companies in the United States.
It is named after the Russell Investment Group, which operates the index.
The share price can vary significantly, as it is made up of a diverse range of small-cap publicly traded companies.
Small-cap stocks are generally ones with a market capitalization of between:
$50 million and $2 billion.
CRITERIA TO LIST STOCKS
There are a few criteria that needs to be met to qualify for the inclusion in the Russell 2000 Index:
• The company must be a publicly traded U.S. company.
• It must market capitalization of at least $50 million.
• Must be ranked in the bottom 2,000 of the Russell 3000 Index , based on market capitalization.
• Must meet certain liquidity requirements, including having a minimum average daily trading volume of at least 250 shares over the previous six months.
• Must have a minimum of one year of trading history.
WHAT IT CONSISTS OF
The index is made up of the smallest 2,000 publicly traded companies in the Russell 3000 Index , which represents approximately 98% of the total market capitalization of all publicly traded companies in the United States.
HOW IT OPERATES
The index is reconstituted annually, with new companies added and removed based on their market capitalization and other factors.
VOLATILITY & LIQUIDITY
The Russell 2000 Index has a high level of volatility (greater price swings) and low liquidity (ease of flow of orders) compared to other large cap stocks.
DANGERS WITH THE INDEX
Currency risk: When the US dollar drops the index can follow
Diversification: There is no sector for the stocks. When the index drops the stocks follow.
Liquidity: You might find difficulties finding buyers or sellers to ease in or out of your positions.
Volatility: The jumpiness in the market is highly erratic.
Lack of analyst analysis: You’ll hardly see news coverage via the media which means, you could be left in the dark with what is going on in the companies.
Liquidation risk: You have a higher chance at being in a company that is about to be liquidated due to financial issues, no growth, manipulation and cooking the books.
Economic issues: When global economies collapse, stocks drop with it. Small cap stocks are no exceptions. This can affect the investment prospects
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