Small Cap Stock Research

By Stock Research Pro • April 1st, 2011

Detailed and thorough small cap stock research can help investors find stocks that offer great potential for capital appreciation through growth. Small cap stocks are usually those of newer companies that typically will not offer dividends; instead re-investing profits into the company for expansion and growth. These stocks can be subject to tremendous price fluctuation, but these smaller companies are often quite agile with an ability to quickly perceive and adapt to market changes and opportunities.



What is Market Capitalization?


Market capitalization or “market cap” refers to the total market value of a company in dollars. A company’s market cap is arrived at by simply multiplying the number of shares it has outstanding by its current stock price. For example, a company that has 30 million shares outstanding and a current market share price of $10 would have a market cap of $3 billion. Small cap companies are generally considered to have market capitalization of between $300 million and $2 billion.

Why Invest in Small Cap Stocks?


Small cap stocks can represent a significant investment opportunity for investors who:

  • Have a considerable tolerance for risk

  • Are willing to forego dividend income

  • Are working under a relatively long investment timeframe

    • Small cap companies are typically more aggressive than larger cap companies with regard to seeking out and exploiting new revenue opportunities and actively attempting to grow and expand for the benefit of their investors. Often, these smaller companies are offering a product or service that is not like anything else in the marketplace.


    Screening and Researching Small Cap Stocks


    One of the best and easiest ways to find small cap stocks that might offer good potential is though the use of a stock screener. Some of the parameters you might input can include:

  • Market cap- You can find companies that meet your small cap size criteria and minimize risk to some extent by filtering for companies with market cap between $500 million and $2 billion. This will eliminate the very small and most risky stocks.

  • Share price- Another way to introduce some stability into your portfolio is by focusing on those stocks with a minimum share price of $5.

  • Estimated earnings growth- You can find those stocks that are believed to offer the greatest upside potential by filtering for a 15% minimum.

    • Predicting future company earnings

  • Current Ratio- This measure helps you to determine the company’s financial strength and ability to pay off its near-term debts. By setting a minimum of 1.5, you can screen out those compnies that are experiencing cash flow issues.

    • A current ratio calculator

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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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