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Small Cap Stocks Opportunities and Risks

Small cap stocks can be both extremely beneficial in financial terms and disastrous to your hard earned money.

Generally, companies with a market capitalization of $1 billion or less are characterized as issuing small cap stocks. In order to determine the market cap of a company you should multiple its number of outstanding shares by the current price per share.

Additionally, the value below which a stock is considered as a small cap varies from source to source.

Small Cap Stock Advantages and Disadvantages

Small Cap Stock Risks and Disadvantages Small Cap Stock Opportunities and Advantages
Smaller companies are threatened by larger competitors. Smaller companies can afford to exploit opportunities that larger companies are reluctant to seize because of their higher overhead.
Different market conditions may be disastrous to small companies, because the latter may lack the financial resources to counteract them. In the same time small cap companies are more flexible. As a result they are more efficient in responding to changed market conditions.
Most small company founders lack the business experience to implement the idea on which they base their company. Some of them even fail to recognize the importance of turning the governance to a professional and as a result see their great idea turning into dust. Rapid growth is easier, since it is easier to double the sales of a company that makes smaller sales than a company with larger sales volume.
Most small companies lack historical data on which to base your evaluations. As a result all you are left is guessing and gambling. Since smaller companies tend to be overlooked by the market, the chances of their price being artificially inflated are significantly lower.

Everyone agrees upon the claim that most small cap stocks carry a high degree of risk. This is especially true for companies which have market capitalization of less than $500 million.

However, even though small cap stocks carry a great degree of risk, you should not ignore them and make them a part of your investment portfolio.

You should have in mind that most of today's most successful companies have started as small companies, which under the proper management have turned into leaders in their industries. There are many examples, such as or Sony.

Finding a Small Cap Company

Since the information available about small cap companies is limited you may be required to do some extra work.

However, it is recommended that you invest in companies with which activities you are familiar and comfortable. Understanding is a key to success, so try to invest in companies you possess knowledge of or at least of the industry in which they operate.

Additionally, try to be as realistic as possible. Even if you like a particular company a lot, if it suffers deep debt or has no cash, it is better to pass it by and look for another investment opportunity. There are plenty of them around.

Apply the necessary discipline and patience. Give the company enough time to grow to its potential and be sure to understand that when you invest in a small cap company you are making a long term investment.

In order to facilitate your work with finding a small cap company you can use the services of some of the online stock screens, such as the Business Week Online.

When you decide on whether to invest in a small cap company determine how averse you are to risk. If you are not comfortable with risk avoid investing in small cap stocks. On the other hand if you can afford to take the risk which such investments carry, allocate a portion of your investment portfolio to small cap stocks.

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