But sometimes, big ideas and big investment returns come in small packages. In this article, you will learn how you can find and evaluate a winner in the micro-cap market. There are over 9, publicly-traded securities in the United States. But there are also many overlooked and misunderstood smaller companies in this investing universe that are worth a hard look. Mini Equities By smaller companies, we are referring to the "Mini-Mes" of equities - micro-cap companies.
Although less talked about by Wall Street analysts, micro-caps are not wholly unknown; in other words, you will definitely find many companies that you recognize among their ranks, just below small caps.
Micro-caps can provide significant diversification to your portfolio. This asset class typically has very low correlations with other U. As Figure 1 shows, however, micro-caps carry higher risks than many other asset classes.
Analyzing Micro Caps Micro-cap companies don't generate fat investment banking fees for Wall Street firms, so they rarely enjoy regular research coverage by analysts. As a result, it can take more time and effort to analyze a small company than a large one, and fewer published reports means an investor must do more original research. The result, however, is that micro-cap stocks often don't trade at their full values, creating a price inefficiency from which savvy investors can benefit.
When it comes to analyzing a micro-cap company, the approach is the same as for a larger company; only what you emphasize in this analysis will differ.
You'll probably review the company's financial statements to learn how much net profit is being earned on revenues, how high debt levels are compared to the company's capital base and whether the company is generating cash or burning it. What you may discover is that many micro-cap companies aren't making money yet. Earnings are probably negative, so the traditional stock valuation ratios won't make sense. You may also notice a sizable deficit in shareholders' equity , where a positive number ought to be.
Don't be too alarmed! These may be signs that the company is in its early stages of fast-paced growth. With a micro-cap company, how you spend your research time gets turned upside-down. Unlike with large cap companies, for which historical financial performance is a window to the future, non-financial information holds much more value when looking at a micro-cap stock.
For a small, expanding company, financial statements are out-of-date the minute they're filed. Be sure, however, that the company does file financial reports with the SEC , and that it does so on time. When an OTCBB company doesn't file timely reports, it is given a short grace period by the regulators but is then removed from the exchange. Delayed filings, as well as unusual auditing issues, are major red flags. It is critical to stay informed on consumer and industry trends, if you are to be successful in choosing the winners from the losers.
Technological advances and changes in consumer tastes and lifestyles can make or break even the strongest companies. Future-focused studies, like the predictions of trend-guru Faith Popcorn , can clue you in to the latest brands, attitudes and ideas about to rock the world.
The promise of wild returns in micro-cap equities, however, comes with a price. Liquidity is usually limited, meaning that you might not be able to sell a micro-cap stock quickly enough to minimize losses when things go wrong. Also, it may be difficult as an individual investor to conduct the depth of original research required. Be warned that these companies are like shooting stars: Be careful to only risk as much money as you are prepared to lose.
And remember that valuing micro-cap equities can be especially challenging if you aren't familiar with non-traditional price valuation techniques. Gaining Micro-Cap Exposure How can you invest in micro-cap equities if you don't have the time or skill to do the necessary due diligence? Consider investing in exchange traded funds that track a micro-cap index, such as the Russell Micro-Cap Index. Also, you might want to check out some free research ideas from independent, fee-based research firms.
These firms issue stock reports on many interesting micro-cap companies that just might be right for your portfolio. The Bottom Line Remember when investing that bigger is not always better. Investing in micro-cap companies can bring in great returns, though they do come with significant risks.
As always, do your research and you should be able to reap rewards from winners in this market. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews.
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Become a day trader. Google Finance Figure 2: Micro-caps outperform large caps and small caps Micro-caps can provide significant diversification to your portfolio. Questions to think about include: Has this company invented a compelling product or service that taps a unique niche in the market place? Does the company have a better way of doing things? Will the company's offering be in demand in the future, no matter what the economic cycle? How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage.
The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...