(Newswire.net — December 11, 2020) — Small-cap stocks can often get a bad rap for their volatility and abrupt price swings. But the thing about small-cap stocks is this: if you know how to do your research, then investing in small-caps could work in your favor. When you do the right research, you could end up investing in an amazing small-cap and getting a big return. Read on to see how small-cap investing could benefit you, and consider these three incredible tips on how to research small-cap stocks.
Why Investing in Small-Caps Matters
It’s true—small-cap stocks are one of the riskier investments when it comes to stocks. Because they do not have all the resources and financial cushioning of large-cap companies, small-caps are more vulnerable to the economy and different conditions. They often experience abnormal price swings in comparison to large-cap stocks and it’s harder for small-cap companies to stay afloat during economic downturns, which affects their stocks even more. They’re super volatile, and there is no guarantee that a small-cap stock is a safe investment. With all of this in mind, you might be wondering why you should even bother investing in small-cap stocks.
Despite all of their risks, many people are investing in small-caps. They are some of the only stocks that will get you larger returns. Small-cap stocks have nominal annual returns that are either about the same as large-caps or greater. For instance, from 2003-2013, small-cap stocks yielded an average annual return of 9.12%, while large-cap stocks yielded a 7.12% return. And when it comes to investing your assets, that could be a significant contributor to larger profits. Legendary gold investor and billionaire Eric Sprott made a large portion of his wealth by investing in up-and-coming precious metal companies within the small-cap sector.
There is some way to offset the risk of investing in a small-cap. When you diversify your portfolio, any potential losses from a small-cap could be made up by gains in a different stock. This could work the other way as well; since they provide diversity to your portfolio, small-cap stocks could also produce greater returns and help offset any losses.
With small-cap stocks, you could potentially be investing in the next big thing. You could see returns of up to 100% or more in some cases. Of course, the risk is there, but when you know how to research small-cap stocks properly, the chances of you being successful in small-cap investing are higher.
Here are 4 Tips You Need to Know for Small-Caps
When it comes to small-caps, the more research you do, the safer your investment will be. It is important to be knowledgeable on all things pertaining to small-caps, whether it is the background of the company or past financial markers that raise red flags. Check out these three tips for researching small-caps:
1. Dig, Dig, Dig
Many small-cap companies are not well known. This means that there is not a lot of financial coverage or statistics regarding them readily available. While this could put a bump in the road of researching small-caps, it is not something that will permanently hinder you. You just need to use a little more elbow grease when researching small caps. You will need to really dig for essential information like a small-cap company’s earnings, transcripts, and press releases.
These resources are very important to your search as they will provide you with financial knowledge that will help you deem whether a certain small-cap is worth investing in or not. For example, keep a lookout for growth potential. Because small-caps tend to outperform their larger counterparts, small-cap revenue growth of over 20% is ideal. Do not be put off by a small profit margin, as this is standard with small-caps that are in the expansion phase. Consider other factors as well such as:
- Past price appreciation
- Price-to-earnings ratio
- Price-to-sale ratio
- Total addressable market
- Optionality
When you are digging through resources of small-caps earnings and transcripts, the main thing to keep an eye out for is a background in outperformance. This could be an indicator that the small-cap will continue to outperform.
2. Consider the Market You’re In
Considering the market you are in will help you to make the best financial decisions regarding investing, but this is especially pertinent to small-caps. Once you have thoroughly looked into the numbers and background of the small-cap company you are considering investing in, the next step is to recognize the market that you are in. Like most companies, small-caps are influenced by the type of economy and market they are in. If you are in a bear market, then you should probably hold off on investing in small-caps. Small-cap stocks tend to perform best in young bull markets or when the economy is on the rise. It is also worth noting that small-caps are more likely to be affected by local markets than large-caps.
3. Put Your Thinking Cap On
Another important part of researching small-cap stocks is to really consider the needs of different markets and the economy. Try to see if there is any forthcoming market shift that might require a specific solution. For example, a couple of decades ago, the shift from CD to DVD format was a big one. Because it was new, not many companies were ready to provide solutions to help the transition. Those companies that did have software to convert from CD to DVD format did exceptionally well because they were suddenly had the solution to an unforeseen need, causing their stock to skyrocket in value. Look at both global and local markets, and explore sectors such as medicine, cannabis, and technology.
Get Ready to Work
Investing in a small-cap company is no small feat. It requires extensive time and research, consideration of past indicators and current market trends, and keen knowledge of investing. The reason for doing extensive research when it comes to investing in small-caps is so that you don’t end up investing in a company that is a bust. Narrow your chances of losses by researching these risky investments. Who knows, you could end up investing in the next big Amazon or Apple.