Profit from Investing in Small Caps

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By Jacob Maslow

Small and mid-cap companies are currently a good choice, according to Eric Marshall of Hodges Capital Management. Stock prices underwent major volatility in September and October. This caused a major disconnect amongst investors.

Small-cap companies have a total market cap of $300 million-$2 billion.

Many of these companies struggled during September and October, and investing in these companies now can be a smart choice. Ideally, you want to research the company to understand their business model and how the company earns revenue. You want to understand the mindset of the managers and CEO as well. Researching key individuals in a company is also smart choice. These companies can be a high risk if you don’t do your research prior to investing.

Another key point is that you want to find a company that can do well despite the market. This may be a company that has diversified different sectors, or has a product that is very unique. Funeral homes are a good example of an industry that is less affected by the macro environment. People always need funeral homes, and many of these entities are small-cap companies that you can invest in.

The food industry also has many small-cap companies in particular niches, such as egg producers.

There are three main benefits to investing in small-cap stock:

1.     Massive Growth Potential

Many large companies have started small-cap companies. Walmart and Microsoft started as small-cap stocks. Investors that had the foresight to invest in these entities would have profited greatly if they sold their stock today.

When a company is small, they have the ability to grow much faster than large companies. Companies that are in the $1 billion-$2 billion range don’t have the same potential to grow as a $500 million company that can double in size rapidly.

2.     Mutual Funds Don’t Invest In Small Caps

Mutual funds are heavily regulated by the SEC. For the most part, mutual funds will not invest in small-cap companies, allowing investors an advantage of buying the stock early in the company’s existence.

The issue with institutional investors is that they’ll buy stock in such large numbers that it alters the company’s prices dramatically, often higher than the true value of the company.

3.     Small Caps Are Under-Recognized

A lack of coverage of small cap companies often allows their stock price to be undervalued or improperly priced. Many investors will be able to buy these stocks that lack analyst coverage and the coverage of Wall Street at a lower price because they’re not recognized.

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