How Might You Clearly Define A Small Cap
How can we define a small cap stock? The generally acknowledged definition is often a stock who’s current market capitalization is $250 million to $1billion. However, that explanation isn’t going to explain why Penny Stocks are so popular.
For the new investor, or perhaps someone that has a small stock portfolio, penny stocks can certainly look like the right investment decision.
Small Cash Investment
Considering that many small cap stocks trade under $5 (with several trading sub $1 – hence the widely accepted term penny stocks), its easy to create a diversified portfolio of small cap stocks. Consequently, it won’t take a lot momentum to generate 50%-100% gains. Obviously – it does not take very much to lose 50% of one’s investment if someone dumps his or her shares right away.
The Next Big Thing
So, who would not really want to be able to claim they got into the next big stock – its all about the bragging rights. Furthermore, if you ever took a position in a company at $.10, you make 5 a share plus.
Many mutual funds have got policies set up that will not let them own stocks that trade over $5 – that means you do not worry about an institutional trader dumping their positions, dropping the share price dramatically.
It’s All About The Size
Consider – penny stocks are not just anything that trades under $1 – you’ll find microcaps as well as nanocaps you can trade – just keep in mind these stocks generally certainly not very liquid – making it tougher to accumulate a position, and more importantly, get out of a position. You might determine if they’re also listed as a pink sheet – normally microcaps and nanocap shares are valued at that level for a reason: inferior financial records – and that is presuming they’re even filing them.
There are roughly 1600 small cap stocks to pick from – supplying you with with a good amount of choices. Having said that, merely 350 or so trade with a 50 day average volume of 500 000 – nevertheless, a lot of excellent choices. Don’t forget, small caps stocks have historically outperformed larger caps.
You might find that a few small caps will not be start ups – rather, are former large caps – avoid these former glory stocks – you need companies that not only have got a good idea, but have got a rising consumer base (whom of course are spending cash for the firm’s products). Search for growth rates of at least 20% and at the very least, positive Earnings per share.
Volume will continue to be your most significant concern – stay with companies where the average volume is 500 000 so you don’t need to bother about dropping the bid price too much when you sell for large gains.
Keep in mind, no matter whether you refer to them as small cap stocks, nanocap stocks or small caps, these are high risk opportunities and should just take up a very tiny percentage of your present stock portfolio.
PennyChase.com FAQ #2 Why Buy Penny Stocks? (Pinksheet Pick