Small cap stocks have been surging over the past few years. And, the reason for that is simple. Statistics show that, even though they are a riskier investment, small cap stocks perform better than long cap ones. Namely, some of the most popular small-cap indices had returns of up to 17.9%.
The growth of small cap stocks is powered by multiple factors, including a good economy, the rise of international markets, deregulation, and tax reforms.
The fact that they bring a greater return on investment is one of the main reasons why small cap stocks have become attractive to investors.
However, to get the most out of them, you need to do so strategically.
Here are a few facts about investments in small cap stocks that will steer you in the right direction.
What are Small Cap Stocks?
Small cap stocks represent securities of publicly traded businesses that are worth between $300 million and $2 billion. Even though these businesses usually have a high stock price, it’s the number of stocks available that make them small.
Now, small cap stocks provide greater benefits for individual investors over their institutional counterparts. Namely, institutional investors usually invest in greater blocks of shares that usually represent a smaller percentage of a company.
On the other hand, small cap investments represent a greater fraction of a company. For you as an individual investor, this means that you won’t automatically trigger SEC (Securities and Exchange Commission) filings because you don’t buy greater blocks of shares.
Why Should You Invest in Small Cap Stocks?
Given the facts provided above, it’s logical that investing in relevant small cap stocks are a great opportunity for building solid, long-term value. Here are some of their benefits over large cap stocks.
- Undervaluation possibilities
As an investor, your goal is to invest your money in young companies that are still undervalued by their market. And, as small cap companies are still unknown, their shares are usually sold at a far lower value than their inherent value.
- Acquisition opportunities
Just because a small cap company is still unknown in the Wall Street ecosystem doesn’t mean that the industry leaders haven’t noticed it. Actually, many small cap companies never become large, multinational conglomerates because they get acquired by larger companies in their niche. For you as an investor, this is just like hitting a jackpot, given that the acquisition will boost the business’ current stock price.
- Better performance
When familiarizing ourselves with stock investments, we usually read about the price of big companies’ takes. However, what we usually forget is that small cap companies can beat the ones of large cap stocks over time. Just like I’ve already mentioned, the return on investment in small and large cap companies is almost the same, meaning that small cap stocks can be just as profitable as buying into large companies.
- Greater growth potential
This one is obvious. Investing in small cap stocks means that you’re buying them before a company grows and starts dominating its industry. In other words, you are buying small cap stocks at a relatively low price and have an opportunity to grow your profits later as the company’s stock value skyrockets.
How to Invest in Small Cap Stocks?
Now that you know the greatest advantages of investing in small cap stocks, now let’s see where and when to do so. Here are a few tactics you will want to apply.
- Look for paradigm shifts in the market.
The idea behind that is simple- you need to do continuous research to identify a key industry shift that requires an innovative solution provided by a standalone company. For example, this happened with the migration from mainframe computers to personal ones that required all devices to be connected. Back then, Cisco was the only company that addressed that problem supplying the market with networking tools. Sure, this contributed to the growth of the company and a huge increase in its stocks.
- Invest in industry innovators before big companies notice them.
Once you identify a company that offers innovative market solutions, you should invest in its stocks before it gets noticed by big industry players. Namely, once a company gets acquired by institutional investors, the value of its stocks will also grow.
- Invest in companies that serve solid markets.
This is a golden rule of investing in stocks. You should invest only in those small businesses that serve large, growing markets. These companies can achieve immense growth, irrespective of the small market share. For individual investors, this is a win-win scenario. You’re minimizing the risk of failure and, at the same time, have an opportunity to gain huge profits.
- Invest in shares that offer growth opportunities.
In addition to growth-centered ideas, it’s also important to make sure that the company has demonstrated notable growth in sales. It’s also important to observe a company’s balance sheet to make sure that the small business has enough cash available to stay competitive.
Over to You
Small cap stocks are exploding and they can bring numerous benefits to individual investors. However, to get the most out of them, you need to invest wisely. So, always do your research and test markets continually. Above all, invest in companies with a huge growth opportunity that are not recognized by institutional investors yet.
Any thoughts on investing in small cap stocks? We’d like to hear from you!