What is a small-cap or “penny” stock?
We define a small-cap as an equity trading in a company that has a market valuation of $1 billion or less. Market value is determined by the current price of all outstanding shares that are available for trading. Penny stocks are usually just small-caps that trade for less than $10 per share. Why should I invest in small-cap stocks?
History is on your side. A famous study by Ibbotson Associates has shown that from 1929 to 1999, small-cap stocks have consistently outperformed large-cap stocks. One dollar invested in a small-cap stock during that period would have returned $6,545, versus $2,842 for a large-cap stock -- a whopping 130.3% more. How much money can I expect to make on a small-cap investment?
Our Penny Sleuth team has recommended small-cap stocks that have seen returns in excess of 233%, 65% and 146%…sometimes within a matter of days. Why are small-cap stocks more profitable?
Profit is generally tied to risk. The higher the risk, the higher the reward. Small-cap stocks are generally viewed as higher risk compared to the more stable, mature large-cap companies. Why do some small-cap stock prices rise so fast?
Smaller companies have the potential for a much faster appreciation than bigger, more mature companies. For example, think of how much money General Electric would have to make for its revenues to increase 20%. Then ask yourself the same question about a small-cap company with revenues one-hundredth of General Electric’s. You can see that the enormous upside potential in small-cap companies can send their stocks skyward. Does the small-cap market have its own index?
Yes, the Russell 2000 is the leading index for small-cap companies. Other small-cap indexes include the S&P 600 and the Wilshire 1750. Why do big media commonly ignore small-cap stocks?
Because large-cap stocks account for approximately 75% of U.S. equity market value. Most individual and institutional investors have their money tied up in large-cap companies. There’s a reason they’re called the mass media. Why doesn’t my broker tell me about small-cap opportunities?
By definition, the relationship you have with your stockbroker demands that he advise you on the most prudent investments. Small-cap stocks can be risky. Also, let’s face it: Your broker has a mortgage to pay, kids in college and retirement plans. Commissions on large-cap stocks are simply bigger than on small-cap stocks. How much of my portfolio should I have in small-cap stocks?
There are several formulas for determining the level of risk in a stock portfolio. One standard rule is that the closer you are to retirement, the more conservative the portfolio. That said, the returns on small-cap stocks have historically been much higher than large-cap stocks. Your portfolio should always be adequately diversified between risk and return. Why don’t Wall Street researchers cover small-cap stocks?
There are several reasons. For one, the sheer number of small-cap stocks makes it very difficult to find the best ones to cover. For every large-cap stock, there are 15 small-cap stocks. Secondly, the trading commissions on large-cap stocks are higher than on small-cap stocks -- diminishing the economic argument for researchers spending time and money on small-cap coverage. Think of Penny Sleuth as your personal researcher, pointing you in the direction of the best small-cap investments. Do you get “more bang for your buck” with small-cap stocks?
Like all other economic markets, the stock market operates on the principles of supply and demand. If investors are not aware of a great small-cap company, the demand will be low -- depressing the price of a stock that would otherwise be much higher. It’s our job to let you know about the best small-cap opportunities flying under Wall Street’s radar -- giving you an advantage to rake in huge profits. What is the relationship between interest rates and small-cap stock performance?
When interest rates increase, small-cap stocks tend to do less well. That’s because smaller companies tend to rely on outside funding for cash flow. When interest rates rise, that means small-cap companies have to pay more in interest, reducing their profits. But Penny Sleuth sifts through the small-cap universe to tell you about the best investments -- whether the market is up or down. What are the key characteristics of a small-cap company?
The companies that qualify for the Russell 2000 small-cap index are among the most innovative in their fields. Whether in electronics, biotech or retail, Russell 2000 companies are at the leading edge of change. And it is this collective forward movement that adds true value to the index itself…and to the profit potential of the stocks. ~~~~~~~~~~~~~~~~~~~~~~~~~~
How do you find the undiscovered gems of tomorrow's stock market?
You ask a sleuth... The Penny Sleuth.
Sign up for Penny Sleuth today!
| 
