Finance Tips

Investing in small-cap stocks generally relies on fundamental analysis instead of technical analysis. Technical analysis, which relies on charts and graphs of previous company data to draw patterns, generally doesn’t have the necessary data to draw conclusions. Small cap companies also don’t have the stability of larger companies, and their stock and skyrocket or fall like crazy at a moment’s notice.

Instead, small-cap investors use fundamental analysis to determine how sound the business’s core principles are. A fundamentally sound business is much more likely to succeed than a fundamentally weak business. By analyzing the business’s management, business plan, and financials, a fundamental analyst can form a pretty good idea of whether or not to invest in this company.

Small-cap stocks are generally short term investments. Instead of purchasing a stock and waiting years for fruitation, small-cap investors generally buy their stocks in hopes that the stock will jump in price, netting them a nice sum of cash.

Investing in small-cap stocks is generally a more advanced tactic. New investors should stay away from risky investments like these, and instead focus on learning and applying a proven system. Once a novice investor has some experience under his belt, and a successful system to fall back on, then he can start dabbling in riskier methods of trading.

Small cap stocks are usually the ones that go on to make the enormous gains. It stands to reason it is much easier for a small cap stock to move up easier then an enormous blue chip stock. Most of the stock markets golden stocks were small caps. When they are “Blue chip” it’s time to look elsewhere.

Stocks are generally categorized according to their market capitalization and price value by the market players. Accordingly, we hear terms like large cap stocks, medium cap stocks and small cap stocks. Shares with very small market cap (up to $100 million) and a maximum price value of up to $ 3 are called penny stocks in the market jargon. These are usually cited as the opposite of blue chip shares, which often carry a premium tag. penny stocks are usually traded over the counter (OTC) by the brokers because they are unable to list on exchanges due to their stringent norms.

For one thing, big exchanges like the New York Stock Exchange (NYSE) and NASDAQ prefer top-of-the – line companies for listing. More so because they too are keen to feed on reputation of the companies they trade in just as the latter want to cash in on huge turnover volumes of these exchanges. Second, they also strictly enforce compliance of their norms by the listed companies, meaning that those who fail to do so are automatically de-listed. Such exchanges tend to evaluate performance record and caliber of top management of the company applying to list with them.

In contrast, penny stocks are mainly unlisted and traded outside exchanges. In other words, they are nondescript stocks with listless trading. Penny stocks mostly change hands between brokers, without getting much notice from common investors. This is because this category of stocks is supposed to be risky due to lack of key information on the concerned companies, their promoters and management. Perhaps this is the reason why these stocks are so often targeted by investment scammers.

Nevertheless, penny stocks can also turn in unexpectedly big returns if they rise on the fundamentals of the concerned company rather than any market manipulation. This is because most of the penny stocks are generally quite undervalued due to lack of market support. So, anyone who can lay his hands on the right penny stocks might reap unexpected gains some day.