Small Cap Stocks – Finding Good Companies


October 7, 2010
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There are many things that you can do to find good growth stocks.  The first thing you can do is start with small cap stocks.  By definition, small caps are stocks with a market cap of less than $2 billion.  You can always invest in small cap funds to begin with, but if you want to have a little fun, you can do your own stock picks.

Small caps are good for several reasons.  First of all, they have room for growth.  If they are a $500 million company, they have lots of upward mobility.  They have much more room than say a $10 billion company.

Large cap stocks tend to slow down their growth at a certain stage.  Although they are the ones with all of the media attention, they are generally not the best investments when it comes to trying to find growth in your portfolio.  This is why most aggressive growth mutual funds have mostly smaller companies.  You just won’t find that much growth in large companies.

Secondly, large institutional investors don’t tend to invest in small caps.  The reason is because in order for it to be worth their investment, they would have to buy so much stock that they would end up having controlling ownership in the company.  In order for that to happen legally, they have to get approval by the SEC and that is not a secretive process.

Once investors find out that a large institutional investor wants a particular stock, they will all come in like vultures raising the price.  At that point, it no longer becomes a bargain for the large investor.  So they tend to stay away from small caps.

This means that you as an individual investor will have an easier time finding good stocks that go under the radar.  It is easier bargain hunting when you aren’t competing with the big guys.

 
 
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