Many people do not know about micro cap stocks. According to research, stocks with low market caps outperformed the largest companies year after year. In fact, over 17 years, the largest stocks on the market only yielded about 9.5% a year. The smaller stocks, however, did over three times better – going up an average of 33% a year! This proves the best time to buy a company is when it’s small – before it’s touted by every Wall Street analyst.
The stocks are traded on the OTCBB or the Pink Sheets, so there is no listing standard. Companies that trade on the large markets have to meet a minimum standard before they can list. So take into consideration that micro cap stocks are extremely risky. While there can be a huge upside to your investment, losing a chunk of money is also the other side of the coin.
Invest with these five aspects in mind :
1. Find a company whose market cap is less than their book value. A book value is the value of a company based on its profits as well as the value of everything it owns. The market value is what the market claims that the company is worth. If the book value is higher than the market value, your stocks are actually worth more than what you are paying for them.
2. Buy companies with significant profit expectations. The most time-tested way to judge that is with the price-to-earnings ratio, which is also called the P/E. In order to determine this, divide the current price per share by the earnings per share. The higher the number, the more likely the company is to make higher profits in the future.
3. Follow the insider money! Buy stock in companies that have optimistic management. When insiders are saying that the company is doing well, take that into consideration. Check to see how much of their own stock they are buying with their own money. This is self explanatory – if insiders are selling, begin to investigate why. If insiders are buying more of their own stock, that’s a good non-verbal, positive message about the company’s future.
4. Go against the grain. The best time to buy a stock that you are admiring is when it’s down. Who doesn’t like buying something on sale? The stock market is cyclical just like every other market – what goes up must come down and vice versa. This method works whether you’re interested in long-term or short-term trades. If you have a good stock on your radar, don’t be fooled by the crowds – the smallest bit of bad news can change crowd behavior. Don’t be part of the herd.
5. Find a company that is about to become a household name. The stock market is determined by supply and demand, so use the market cap to determine how well known the company is. Micro cap stocks are obviously smaller, but these companies tend to have higher growth rates and higher rates of return versus their larger, more established counterparts. That means that they have more room to expand…and become well known.
While it is true that micro cap stocks are a risky investment, if you follow these tips and choose to invest in the right one, you will find that the result is a huge reward.