Micro-cap: Innovative and Off-beat Investment for Big Gains
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Keyword: Micro-cap Stock
Micro-cap: Innovative and Off-beat Investment for Big Gains
Why Micro caps are unconventional?
Imagine a situation where an investor has $20,000 ready for investment as he is looking for significant gains over a period of time. He may already know about a few big stocks of some top-notch multinational companies that are creating a buzz in the market. The question is what this investor can do with this money?
One: He can invest all of the money into a couple of large shares.
Two: He can divide the amount among some reputed large stocks, mutual funds, and bonds as a safe bet.
Three: Besides putting the money into traditional shares, the investor can keep some money aside for investing into micro caps.
Now, the third option mentioned above is something that the naysayers may not agree with. Why? Because it is unconventional, and the risks involved are higher than larger stocks. On the other hand, some investors who are not happy with the two-digit returns that large caps and traditional mutual funds offer, try to think out-of-box. They look for much higher gains by making low investment. It’s common in the micro-cap market where investors spend around $500-$1000 to buy micro stocks. It’s a fraction of the amount that people usually spend for buying large cap shares. However, during the positive trending in the stock market, micro caps can fetch much higher returns.
A report that NASDAQ published in October of 2013 showed how much investors gained over a 52-week period from various micro-cap stocks. The highest gain recorded was 800%, followed by 597%, 568%, and so on. It’s definitely an incredible statistic!
Why Micro caps have higher potential to make money
People who are keen to invest in micro caps may have heard many success stories of people making millions through these stocks. It’s possible if the market shows upward trending, and investment is done wisely. You can also join those investors who made big money by making small investments.
The potential to gain big from micro caps is due to their less market penetration. Thus investors can uncover some hidden treasures or stocks that can fetch remarkably higher returns. With a strategic approach, and by blending various stocks that have a potential for long term capital appreciation, investors can make it big.
Most of the micro-cap stocks are undervalued, and it gives opportunity to the investors to include these in their portfolio for optimum gain.
What about the risk?
There are always some risks associated with investing in stocks. The risks are higher in the case of micro-cap stocks as these are highly volatile by nature. Market fluctuations can affect these stocks in a matter of hours and they may lead to rapid changes in the stock price. When market fluctuation is positive, investors can make millions or end up losing their entire invested amount.
During negative market trending, many companies that issue micro caps could become bankrupt, and in other scenario, these stock prices may drop drastically. Usually, most of these companies have low capitalization and don’t have enough revenues to sustain in a tough market condition.
How to curb the risk factor
Despite the unfavorable market condition, investors can curb the risk elements by keeping themselves well informed about the current market, and stocks they have invested in. Lack of information about a company’s financial strength and its past performance may lead to hasty investment decisions that investors may regret later. They need adequate news and research reports to carry out their own research. In addition to that, more updates are required to improve the liquidity issue of these stocks. Lack of liquidity can create problems when buying or selling these stocks.
It is important for investors to keep an eye on the market trending, and accordingly build their stock position. After going through various news releases and research reports, they can find a pattern as to which direction various stocks are heading. One of the easiest ways to find the latest updates is by subscribing to free newsletters to receive alerts as to when the market witnesses some changes.
Check for the following things in the updates:
Information about companies and the types of products/services they offer. Whether their products can fulfill customers’ needs in the long run, and can create a large customer base or not.
The management team that is responsible for a company’s operational strategy and execution is strong and has a good track record.
The companies that offer micro-cap stocks have minimum net profit margins to sustain in the competitive market.
In order to minimize the risk element, investors need to look for reliable sources from where they can get research reports and market analysis on specific companies. This information can be useful to know about the key aspects about those companies and their products/services to make wise investment decisions.
What is the Performance index for Micro Caps?
The Russell 2000 is the index that measures the performances of various micro and small cap stocks in US companies. For larger stocks, there’s the S&P 500 Index, and of course Dow Jones. In fact, the S&P 500 index lists a majority of the US equities (around 75%). On the other hand the Dow Jones lists only 30 leading stocks. However, despite having lesser market presence, micro-cap stocks have been outperforming larger stocks for as long as historical data shows.
The best way for investors to make successful investments is to stay informed. By having key market information, investors can make all the right moves in terms of trading stocks at the right time. Another important aspect is to avoid falling victim of misleading statements on stock gains that often go viral on the social media sites. It’s more about sticking to the basics rather than jumping onto the bandwagon.
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