| What is a small cap stock? First of all, "cap" is short | | | | little stocks. There are just too many of them and |
| for capitalization. Capitalization means the market | | | | they are too small and illiquid for their big institutional |
| price of an entire company, calculated by multiplying | | | | clients to buy. And since many small stocks aren't |
| the number of shares outstanding by the price per | | | | adequately covered, they can be very inefficiently |
| share. Some people define a small cap stock as one | | | | priced. That inefficiency offers a great opportunity to |
| with a market cap of less than $1 billion. But I like to | | | | those who are willing to do the research to uncover |
| define them as ones with a market cap of under | | | | hidden gems. |
| $500 million. | | | | Super-star investor, Warren Buffett, has written, |
| Over time, small cap stocks perform better than | | | | "Observing that the market was frequently efficient, |
| large cap stocks. The record is clear about that. | | | | the theorists went on to conclude incorrectly that |
| However, in reading the commentary offered by | | | | the market was always efficient. The difference |
| investment pundits and Wall Street analysts there | | | | between the propositions is night and day." |
| seems to be a heavy dose of skepticism about | | | | Buffett is saying that smart investors can find |
| whether small stocks are appropriate for a significant | | | | opportunities in stocks that are priced below their |
| percentage of an individual investor's portfolio. | | | | value. |
| One reason for this skepticism is risk. It is true that | | | | However, if you think you're going to get an edge by |
| small cap stocks are much more volatile than their big | | | | investing in Wall Mart, Microsoft, General Electric, and |
| cap brethren. So in that sense, there is more risk | | | | the like, you're just kidding yourself. Those stocks |
| involved. But there is also an attitude among the | | | | have been analyzed to death by teams of Wall |
| investment elite that the individual investor is too | | | | Street analysts. What is known about them is already |
| unsophisticated to handle risk. Therefore, individuals | | | | priced into the stock. There is no way you're going |
| must be protected from themselves by limiting their | | | | to be able to uncover information that is not already |
| small cap investments to a small percentage of an | | | | widely known by everyone else. |
| overly diversified portfolio. | | | | That's not true with small cap stocks. If you do your |
| The last thing that Wall Street types want to do is | | | | homework, you can find some really undervalued |
| empower you to make your own decisions. After all, | | | | investment opportunities. You do have to manage |
| if you're calling your own shots you don't need to | | | | your risk. But that's always the case in any |
| pay for their advice, do you? And since Wall Street | | | | investment you make. So don't let the financial media |
| doesn't cover small stocks, it's in their best interest | | | | and Wall Street elites keep you from using the |
| to steer you away from small stock investing. | | | | biggest advantage that you have over them -- the |
| But the truth of the matter is that it's the very | | | | ability to find investment opportunities that they can't |
| reason that Wall Street doesn't want you to focus | | | | take advantage of. And you're going to be able to |
| on small cap stocks that gives you an advantage. | | | | find those opportunities within the ranks of small cap |
| Analysts for big investment firms don't cover the | | | | stocks. |