Investors look far and wide for opportunities that would provide significant returns. Most probably have exposure to large index funds, ETFs, and bonds. A few may diversify further and go into commodities or alternative assets such as gold and Bitcoin. Capital allocators seek to get the best return to preserve and perpetuate capital and will invest in the best-performing assets.
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A small portion of investors may try their hand at smaller companies that have the potential to grow and provide significant returns over 3-5 years. There are several markets for smaller companies based on market capitalization.
These types of companies range from nano caps to small caps.
We’ll cover small caps today.
What Are Small Caps?
Small caps are companies that carry a market capitalization of $2 billion or less. They usually have a minimum of at least $300million in market capitalization.
Remember that market capitalization is determined by the number of shares outstanding times the current price.
Why Do Some Investors Prefer Small Caps?
History shows a few periods of out-performance in small caps versus large caps, where small-caps beat large caps by at least two percentage points or more. One critical factor is that small caps do not have much institutional support due to certain restrictions. Institutional investors are whales who can allocate funds and move the price of the stock higher, as such regulators impose restrictions to minimize potential forms of manipulation.
Small caps also offer a wide variety of new and fascinating companies to invest in today as there are more than 4,000 domestic companies and many more foreign companies that fall under the small-cap category. Further, bargain hunters and value seekers may find many new opportunities yearly that offer the right advantages.
It is essential to note that not everyone buys into the small-cap premium due to the risks of investing in smaller and possibly more volatile companies. But similarly to large-cap stocks, investors can find ways to minimize risk and only allocate capital to durable and valuable companies.
Professional investors may allocate value evenly across small caps, mid-caps, and large caps.
What Type of Factors Should Investors Optimize for in Small Caps?
Investors should apply similar criteria that they would apply to mid-caps or large caps. Different investors use different strategies and search accordingly. We present general approaches that investors may follow.
- Look for sustainable and durable companies with competitive advantages.
- Companies that have a long history of dividends may indicate proper management capability.
- Buy companies that seem like they would be good long term holdings (at least 3-5 years or more).
- Understand the return on investment potential and return on assets.
- Assess company culture, leadership competence, customer views, and competition.
- Buy robust balance sheets and look for the right prices.
These are general rules when investing in companies, and each investor must figure out what works best for them, for their goals, and their overall strategy.
Disclaimer
Content provided by CryptoTraderNews is for informational purposes only, and should not be construed as legal, tax, investment, financial, or other advice. All information is of a general nature. As always, there is risk with any investment. In exchange for using our products and services, you agree not to hold CryptoTraderNews Pro, its affiliates, or any third party service provider liable for any possible claim for damages arising from decisions you make based on information made available to you through our services.
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