The Basics of Investing in Small Cap Stocks

small cap stocks

Those new to investing in the stock market tend to focus on large cap companies instead of small cap ones. However, Maria Ohle explains that there are plenty of reasons why one should consider investing in small cap stocks with a market value of under $2 billion.

Historically speaking, small cap stocks tend to outperform their larger counterparts due to their often innovative nature. They also have a vast potential for growth, even if many are still in their early stages. This means that small cap stocks can result in major returns for investors, especially when investing at an early stage.

Things to Be Aware Of

Before you start investing, there are a few negatives that you should be aware of. Firstly, small cap stocks are a riskier investment compared to bigger cap stocks. An article from FXCM explains that while they tend to outperform their larger counterparts during economic recoveries, they also tend to be weaker during economic downturns. This is because the companies lack the financial resources that bigger corporations possess during less prosperous times. As such, choosing a combination of small cap mutual funds and ETFs can help mitigate the risk.

In addition, it tends to be a bit more of a challenge to invest in small cap stocks due to the lack of information available. For instance, you might have to do more research to evaluate the potential of a small cap investment, without having access to a substantial history of pricing trends or earnings reports.

>> 5 Safe-Haven Gold Penny Stocks to Buy This Week

How to Invest in Small Cap Stocks:

1. Decide How Much Capital You’re Willing to Invest

If you’re just starting out, devoting all your capital to small cap stocks is generally inadvisable. In an article by Jessica Saini, she writes that experts generally suggest investing less than 10% of your money in small cap stocks. This way, you’ll be able to better mitigate your losses.

2. Do Your Research on the Company

To find hidden small cap stocks, some extra effort is necessary. Taking advantage of price dips and using online tools can be very beneficial when it comes to timing it just right, as you adjust your portfolio over time. A feature from CNBC suggests using certain criteria, such as those with a market cap under $500 million, year-over-year revenue growth greater than 10%, one-year EPS growth greater than 15%, P/E ratio of 15 or less, and coverage by two or fewer analysts.

3. Stick to a Clear Strategy

When it comes to making successful investments, having a clear strategy is the key. During times of uncertainty, Business Insider suggests staying true to your strategy despite what the headlines are saying about small cap stocks. Sticking to your long-term goals as long as you have a sound financial plan, and avoiding impulse decision-making is the way to go. Given time, your portfolio is likely to recover, and you’ll see the value of your small cap stocks.

>> 5 Penny Stock Gainers to Watch

4. Diversify Your Portfolio

You’ve probably heard this advice before, but it still holds true for small cap stocks. When you’re investing, you should try to ensure that your portfolio is a combination of small and large cap stocks. Having a combination of growth and income stocks is important to reduce large losses. US News notes that a good sign of diversification in your portfolio is “if some of your investments are up while others are down.”

Ultimately, small cap stocks come with their own sets of risks and benefits when it comes to investing. Doing substantial research and consulting with a financial expert can help guide you towards making intelligent decisions.

This article was curated through MicroSmallCap’s Contributor Program. If you would like to write for us, send us your submission!

Featured image: Unsplash

Please See Disclaimer

If You Liked This Article Click To Share


Risks and Disclosure:

Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. While all information is believed to be reliable, it is not guaranteed by us to be accurate. Individuals should assume that all information contained on this website is not trustworthy unless verified by their own independent research. Also, because events and circumstances frequently do not occur as expected, there will likely be differences between any predictions made or suggested and the actual results.

All statements and opinions expressed are the opinions of the author and not of Microsmallcap.com or its officers. The author is wholly responsible for the validity of all statements. Microsmallcap.com was not involved in any aspect of the article preparation. The author was not paid by Market Jar Media Inc for this article. The author did not pay Microsmallcap.com to publish or syndicate this article.

This article does not constitute as investment advice. Each reader is encouraged to consult with his or her individual financial advisor; any and all actions taken by a reader as a result of the information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Microsmallcap.com's terms of use and full legal disclaimer. This article is in no way a solicitation for investment. Microsmallcap.com does not render general or specific investment advice. Any information on Microsmallcap.com should not be considered a recommendation to buy or sell any security. Microsmallcap.com does not endorse or recommend the business, products, services or securities of any company mentioned on Microsmallcap.com.

Futures, stocks and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures, stocks, and options may fluctuate, and, as a result, clients may lose more than their original investment and possibly their entire investment. Any content on this website should not be relied upon as advice or construed as providing recommendations of any kind. It is your responsibility to confirm and decide which trades to make. Always consult a licensed investment professional before making any investment decision. Be extremely careful, investing in securities carries a high degree of risk; you may likely lose some or all of the investment.

Please see our full disclaimer here for additional details before making any investment decisions.