What is the best way to find good small cap stocks?

Love investing in the little guy. Want to be part of the next Microsoft? Well then investing in small cap stocks may be the best option. However, how do you find good small cap stocks?

Big fish eat small fish in a competitive market. You can have a great idea and a great company, but a larger competitor can kill you.

Evaluating small cap companies is sometimes difficult due to the lack of information or historical data. Short operating histories make analysis seem more like guesswork.

Therefore, the big question is finding the best small cap stocks for you. Regardless of the risks associated with small cap stocks, there are some great reasons for considering adding them as a modest portion (usually no more than 5% - 10%) of your portfolio.

Here are some good things keep in mind:

1. Small cap stocks have an easier time doubling sales of a company doing $40 million per year than it is to double the sales of a company doing $2 billion in sales. Growing is much easier for companies that are small cap stock.
2. Smaller companies can tend to stay out of the eye site of intense market attention longer. This keeps the price from being bid up too high or knocked down too low. Most mutual funds, for instance, do not invest in small cap stocks. (The exception, of course, would be funds that deal specifically in small cap stocks.)
3. Small companies tend to be more flexible they tend to react quicker to market and technological conditions. Small companies can take advantage of opportunities that larger companies cannot afford to chase because of their larger overhead.

Now that you can see the benefits of small cap stocks, you can choose which small cap stocks will work for you. Nevertheless, how do you know which ones are better than the others are?

Here are some tips:

1. Stay away from newest edge technology, because this is so risky on its own, when coupled with small companies becomes a complete gamble.
2. Use logic, if the company has no chance of success then do not invest.
3. Be patient. Plant your seed and let it grow. Investing in small cap stocks is definitely a "buy and hold" strategy.
4. Invest in what you know. If you have expert knowledge or extensive experience in a particular industry or technology, this may be a good place to start looking.

The goal is going to be looking for a company that is like an authentic, perfect condition Spiderman magazine at a yard sale for $10.00 that is really worth hundreds.

You need to find the company that is worth more than what the price is listed. Just because other people do not know the value, does not mean it will not get that value as time goes on.
In stocks, a company's value is called its book value. Essentially, if you sold everything the company owns - inventory, buildings, even the desks and chairs, how much would be left over?

Now look at what the market thinks the company is worth. You will find that in its market cap, the number of stock shares the company has times the stock's current price. That is how much money you would need if you wanted to buy every single share of the company's stock.

The most used way to judge that is with the price-to-earnings ratio, also called the P/E. That is the company's current price per share divided by its earnings per share.

The higher the P/E, the more profits investors expect the company to make in the future.
You will also want to measure their management's enthusiasm Take a look at how much of their own stock they are buying with their own money.

Do not be afraid to look out for the less likely or lower end stocks. Take a chance and invest in stocks the other guy may not.

Market cap is one way to judge how well known a company is. As you probably know, stock prices are determined by supply and demand. The less demand there is, the lower the price will be. Look for the next new tennis shoe jogging on your favorite path.

All and all, keep your eyes open, be willing to risk a little and do your homework. You will make the money you want for your future investments and beach house.

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