These Stock are Fast Moving with BIG $$ Potential
Dear Penny Stock Millionaire,
Because of their size and market position, small-cap stocks enjoy certain benefits and risk reward ratios that you won’t find with other types of stocks. Today I’m going to dive into some of the specific benefits of trading small-cap stocks
Let’s get started!
Benefits of Trading Small-Cap Stocks
Small cap stocks allow you to take advantage of global trends. When investing in small-cap stocks, you can actually benefit from the same trends that might be affecting large-cap stocks.
According to Barrons, “In general, the two indexes tend to move in the same direction, despite some performance gaps. Since 1994, in 78% of the months when the S&P 500 lost ground, the S&P SmallCap 600 was down too.”
As the article goes on to share, in only 24 out of 297 months since 1994 has the SmallCap 600 lost while the S&P 500 gained.
This means that in general, you can look at sectors that are trending positively in the large-cap world and apply them to the small-cap world to find emerging opportunities.
Small-cap stocks are an opportunity for individual traders. Large-cap stocks are better known, but small-caps can give you the coveted edge as a trader.
Many big investors don’t waste time with small-cap stocks. These are the same people who turn up their noses at penny stocks, dismissing them as too volatile and risky.
This is true. The volatility is higher, and so is the risk. However, this is what allows investing in lower-priced or small-cap stocks to be so potentially rewarding.
The fact that fewer large investors are interested in small-cap stocks creates opportunities for people like you and me. There’s less competition, and if you’re willing to take a few extra steps and do thorough stock research, you can stand to benefit bigtime.
Room for Growth
The smaller the cap, the more room there is to grow.
Small-cap stocks are generally offered by less known companies. However, as the company grows, its revenues and earnings can increase over time. After a while, the public will become more aware of these companies, and the demand for the stock will grow.
If you can be ahead of the curve, you can benefit from this growth as a trader.
Say a big business like Amazon has a new product launch. It might move the stock a little, but probably not massively.
Why is this? Because a million analysts have covered it, so you’re not getting in on some undiscovered opportunity.
A product launch for a small-cap company can have a much bigger impact on the stock price. But since smaller companies don’t get as much analyst coverage, it’s up to you to discover these opportunities.
The good thing here is that since many traders aren’t willing to put in this extra work, you can truly get in on the ground floor in this way. If you’re savvy about following the news and see such an opportunity, you’ll know it’s time to pounce.
Small-cap companies are better poised for greater growth. Big companies are like a huge ship: harder and slower to steer.
Smaller companies, on the other hand, are much more nimble and can develop far faster. This can actually make them very appetizing as acquisition prospects for a larger company.
Rather than establishing a new branch or product division, it’s often easier and quicker to simply buy a smaller company.
This means that if you saw an opportunity in a small-cap company, and then it’s acquired by a large-cap company, you could potentially enjoy the financial rewards that come with that big news catalyst.
Before you Begin
Before you can start trading small cap stocks (or any kind of stock for that matter) you should ALWAYS begin with technical and fundamental analysis.
Technical analysis is what differentiates smart stock picks from random stock gambling.
By carefully evaluating what a stock has done in the past, you can get a good idea of what might happen in the future. No, you can never know exactly, but often enough, it follows a similar trajectory.
I consider myself a glorified history teacher.
In my eyes, trades live or die based on charts.
By looking at a stock’s chart over periods of time and based on various indicators, I find patterns that emerge over and over — and once I’ve identified them, I can predict them and use them as cues for where to enter and exit trades.
That’s not to say that this is how it works out every time. I’m not right all of the time, and you won’t be either. Sorry, but there are just too many factors at work. Single spikes can occur based on news or a big event.
However, frequently enough, stocks follow predictable patterns, and by observing and pinpointing them, you can take advantage of this phenomenon.
A great trading platform is key here. You’ll need to evaluate a stock’s specific price movements over time with technical analysis tools like the simple moving average, moving average convergence/divergence, relative strength index, and the parabolic SAR.
With small-cap stocks, it’s particularly important to get technical, because what data is available can be extremely helpful in allowing you to create an intelligent trading plan.
As an avid follower of stock charts and data, it’s probably pretty obvious that I’m mostly focused on chart-based analysis. However, there is another type of analysis that’s also very important for every trader to include in their research: fundamental analysis.
Fundamental analysis involves poring over the company’s performance and researching who they are and where they are going. You’re looking for debt, how they handle their finances, potential big catalysts that could affect the price of the stock.
Fundamental analysis is important when researching small-cap companies because the fact is you might not have as much technical data to pore over. Fundamental data can help you determine whether or not it’s a good pick.
Yes, you will need to know some finance basics to get the most from your fundamental analysis. But that is all part of your education.
Where technical analysis is all about numbers, fundamental analysis offers a little bit more backstory about the company. In this way, both fundamental and technical analysis work hand in hand.
Together, you get a series of checks and balances. Technical research can support or refute fundamental analysis. Fundamental analysis can help make sense of the technicals.
The Bottom Line
Small-cap stocks can be a great investment if you know what opportunity they present. They can move rapidly, there is tons of opportunity for smaller investors, and there is huge profit potential because of their volatility.
Tomorrow, I’ll tell you exactly how you can start your search for finding the best small-cap stocks to invest in and continue to bulk up your portfolio.
Editor, Penny Stock Millionaires