When it comes to small-cap stocks, the rewards could be huge. However, due to the volatility of investing in them, there is also high risk. Knowing how to research small-cap stocks is the basis of finding small-cap stocks with huge growth potential.
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Why You Should Add Small-Caps to Your Portfolio
With their high volatility and price swings, you might be wondering why you should even invest in small-caps. Their uncertainty and risk could be off-putting, but here is a promising fact: past indicators show that small-cap stocks often outperform large-cap stocks and could be equally, or more, profitable than large-cap stocks. In the span of 37 years, small-caps outperformed large-caps 20 times. The reason why small-cap investing carries both risk and promise is that you are essentially investing in a company before it makes it big. Investing in a company when it is in its expansion stage means that you are there when the stock price is low. You could potentially make a nice profit when the company finally blows up and the stock price shoots up.
Another reason to invest in small-cap companies is that it will diversify your portfolio. Diversification is essential when investing because it can help you offset any losses. When you invest in many different types of stocks, you are helping minimize the risk of significant losses. Basically, you might end up losing money in a stock that you invested in, but your other investments potentially made enough money to make up for what you lost. Diversification is one of the most important components of reaching your long-term financial goals while lessening risk.
Small-caps are tricky. They require a lot of research and consideration before investing. You want to make sure that the company you invest in is successful. Who knows, you could potentially be investing in the next Amazon—or the company you invest in could take a nosedive and won’t make it big. But if you know what to look for, then the chances are greater that you invest in a successful small-cap company and make a decent profit.
The Right Research Matters
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When investing in small-cap stocks, the right research matters. It’s not just about typing “best small-cap stocks” into your search engine—you need to know what to look for. Conducting the right research means searching for market shifts, looking into growth potential, examining the market cycle, reading the risks, and following experts. Doing these things is what could lead you to those small-cap stocks with huge growth potential.
5 Tips to Find the Best Small-Caps
1. Search for Shifts
Knowing how to research small-cap stocks means that you know how to read the market. Search for market shifts that open up new opportunities for up-and-coming companies. This means looking into different fields of business for anything that requires a new solution that could be provided by a smaller company. A good market shift example that blew up certain small-cap companies is the move from CD to DVD format. All of a sudden, there was a need for software to convert CD into DVD format, and companies that provided this solution increased their value dramatically.
2. Look Into Growth Potential
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Scouring the market for shifts is not the only thing to consider when researching small-cap stocks. You also need to analyze small-cap companies’ growth potential. Here are some metrics to look into:
- revenue growth
- earnings growth
- price-to-earnings ratio
- price-to-sales ratio
- past price appreciation
- total addressable market
- Optionality
Knowing a small-cap company’s growth potential will help you make an informed decision. You don’t want to invest in a company that has not been doing well. With small-caps already being a risky investment, investing in a small-cap with low performance and growth is too much of a risk.
3. Examine the Market Cycle
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Examining the market cycle will help you determine when to buy small-cap stocks. Usually, small-cap stocks outperform during young bull markets. On average, small-caps do best when the U.S. economy is in recovery mode. They have an advantage during these economically rebounding periods, which is why this is typically a great time to invest in small-cap stocks.
4. Read the Risks
As with any investment, nothing is certain. This is especially true when it comes to small-cap stocks. Because they have the potential to rake in large profits, they also have the same potential to dredge up large losses. Their volatility is high, so expect large price swings.
5. Follow the Experts
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An easy, beginning way to research which small-cap stocks are best is by keeping an eye on the experts. Check out leading organizations that already have small-cap stocks in their portfolio. If you see them investing in small-cap stocks of a certain kind, follow their lead and look into investing in the same ones—it could be a good starting point.
Make sure to do your own research on the experts you follow. Sometimes these experts only brag about their success stories but fail to share their losses as well. Typically, the best experts are open book and share their positions and reasoning.
The Bottom Line
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Aim for success in small-cap opportunities by knowing how to research small-cap stocks. Always look into all aspects of small-cap companies and stocks: from their growth potential to the current market cycle. A good initial step is to look into what leading organizations have in their portfolio and follow suit.
To begin finding small-cap companies and stocks, you can look into Nasdaq, Stockwatch, OTC Markets, and SmallCap Network. Small-cap stocks carry risk, but the right research will give you leverage when investing in the small-cap market.
Most importantly, take the time to study and analyze investment opportunities until you are comfortable with your decision. Yes, there will be small-cap companies that you never pull the trigger on and decide to walk away. That is fine as well.
Eventually, you will find key resources that you trust. These resources will help you expedite your research process and further confirm your gut instinct for the investment opportunity.
Stay informed and consider these tips and tricks to find the best small-cap stock opportunities on sites like Dear Retail.
