You may not be entirely new to the world of investing, as an Intuit stock holder, but you’re looking to diversify your portfolio and delve further into the market. Small cap stocks can be a great option for you to consider. What is a small cap stock you may be wondering? Small cap stock is investor jargon for shares in a smaller company. Don’t let that definition fool you though, some of these so called small cap stock companies are actually not that small at all. This article will provide you with some options to consider before deciding whether or not to invest in small cap stocks.
Large Growth Potential
One huge benefit to small cap stocks is their enormous growth potential. A company that is already making in excess of two billion annually may have a hard time increasing their revenue even further. Small cap stocks do not have this problem. These businesses don’t have exorbitant annual revenues, but that allows them the ability to easily increase sales and growth by creating new products or expanding into new markets. Keep this in mind, as this is a huge advantage to investing in small cap stocks that large cap stocks do not provide.
Market analysts focus almost the entirety of their efforts on speculating about large cap stocks, not small cap. By allocation definition, there are far less investors in this sector. While that may seem like a bad thing to a novice investor, there can be huge benefits to this. As long as you are willing to do your own research about small companies you may be considering, you may be able to find a hidden gem. Because other investors aren’t hearing about these opportunities through market analyst speculations, you won’t have to worry about share prices being driven up out of a reasonable range of returns. As long as you’re willing to do the leg work, less speculation can be a great benefit to you.
One potential downside to investing in small cap stocks is the lack of liquidity as compared to big cap peers. Because there is less of a market for small cap stocks, you may not be able to sell your shares as quickly as you would like. This can be especially bad if the company takes a severe downturn while you own shares. However as the company’s revenue grows, so too does word surrounding it. This can mean that more investors hear of it and in turn start looking to buy. So as long as you do your research before buying, you may be able to eliminate some of the risk associated with small cap stock’s liquidity or lack thereof.
Best Small Cap Stocks
The best small cap stocks to buy are those with the highest median ROE, or returns on equity. For the last three years, the top three companies with the highest ROE have been Natural Health Trends Corp., PDL BioPharma Inc. and Aspen Technology Inc. These companies are from the household/personal care industry, biotechnology industry and packaged software industry, respectively. If you want to start investing in small cap stocks, try investing in these top options.
Investing in small cap stock can be great for your portfolio and possibly your wallet further down the line, even if you do not have a finance degree. Keep in mind that while shares in small cap companies may have the disadvantage of less liquidity, as the company grows and word of mouth spreads that may change for the better. Small cap stocks have huge growth potential as their somewhat limited revenue provides them with much more room for expansion and increase in sales. You may think that the little research done by market analysts related to small cap stock may be a downside, but this can actually be a huge advantage. As long as you are willing to commit time to do your own research, lack of speculation can provide you the opportunity to find a hidden gem before others drive up costs. Keep these things in mind when considering whether or not to invest in small cap stock and remember to do as much research as possible to make the best decision for your portfolio.
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