I have to admit, I love small cap stocks. Whether you’re a stock trader, investor or both, they give you a lot of opportunity. Because they aren’t usually very large companies, the degree of institutional investment is a lot lower than your larger stocks, like Google, Amazon.com, Microsoft, etc.
One thing I see out there a lot is market analysts saying small cap investing is risky. I’m sorry, but isn’t all investing risky? I seem to recall a large number of institutional investors taking a bath on well-known stocks over the past few years. Financial turmoil affects everyone. The main reason many “talk down” about small caps is because the stocks aren’t large enough for them to invest in.
If you’ve got $10,000, you’d be hard pressed to find a company you couldn’t comfortably buy stock for. However, if you’re managing $100 billion, the stage has changed dramatically. And that’s why it’s great to be you. You have a world of opportunity at your feet.
As with any investment, you want to look at what’s hot or going to be hot again. I tend to look at bio tech first. Why? It’s something that will never, ever go away. We’re always looking for the latest medical breakthroughs to improve our lives. I also look at companies that specialize in producing consumable resources that are vital to life (oil, etc).
Growth, Not Promises
You want to identify stocks that are actually moving. You want growth, plain and simple. Don’t try to predict patterns. Let them come to you. If a stock isn’t moving now, let it be. There’s more fish in the sea.
Also, don’t get caught up in “this company is poised to do [insert whatever here]” type chatter. Leave that for the suckers. Sure, sometimes it’s right, but often it’s not. Again, you don’t need to be a fortune teller to make consistent profits in the stock market.
Earnings Boat Loading
A lot of investors try to buy up small cap stocks ahead of the earnings report. This is usually a bad idea. I think it’s certainly fine to pick one small cap to try this with, but loading up the boat is just going to sink you.
It’s one thing to take a calculated risk, it’s another to go on a gambling spree, hoping to get lucky.
Progress always involves some risk, but risking your hard-earned capital foolishly is a great way to end up in the poor house. Small cap stocks can yield far greater rewards, but you have to understand the risk, do your homework and not get in an all-out-risk-taking mode. Never be afraid to pass on an opportunity, there are plenty out there in small caps.