Small Cap Stock Tips
The Russell 2000 index of small cap funds contains 2,027 stocks with market capitalizations from $78 million to $1.6 billion, with a median market cap of $300 million. Small cap stocks are not followed or analyzed as well as the big companies in the S&P 500. But the individual investor with good research skills can find hidden value in the small cap universe. Remember, Microsoft, Apple and Starbucks were all small cap companies once.
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Skills
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The small cap investor needs to know how to analyze a company's income and balance sheets. An understanding of different financial ratios is necessary to compare the relative merits of stocks. You should be able to compute and analyze ratios like price-to-earnings(P/E), price-to-sales (P/S), price-to-book (P/B) and price-to-earnings growth (PEG). The PEG ratio can be especially useful to narrow down a list of potential stocks. A helpful website that is dedicated to helping new investors is The Motley Fool. A book on the basics of stock market investing would be a good reference source.
Screen for Stocks
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Once you understand the ratios with which to analyze different stocks, you can use a stock screener to find stocks with the characteristics you desire. The major online financial sites like Yahoo Finance, Google Finance, Marketwatch.com and the online brokers all have computer stock screening tools. You can use the stock screens to narrow down the thousands of small caps to a smaller number. The screens will allow you to define criteria like market cap, dividend yield, ratios and growth rates. Use stock screens to find a list of stock that meet your investment criteria for further research.
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In Depth Research
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Only one or two analysts might follow a small cap stock, compared to the 40 who write about Apple. There will be little information in the regular financial news channels about the companies. The best source for information is often the company's investor page on their website. Most companies put out detailed quarterly earnings reports that have a lot of information about the company's prospects. Listen to the online archives of recent conference calls. This research into small cap stocks is about discovering information about a company that the investing public has undervalued. Once you have discovered small cap stocks you want to invest in, it is important to monitor them closely to see if your analysis has been correct.
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