Small-Cap Stocks should be a part of Your Portfolio

The market is filled with “un-sprouted” small-cap stocks; these are companies that have a market cap of less than $500M. These investments are risky, but they can also offer returns of up to 1000 percent if you invest in them smartly.

Many big time investors will overlook these small-cap investments because of their potential risk, but because of the huge return potential I really feel that they should be part of every investor’s portfolio. Small-cap stocks are from businesses with small market capitalization and if you invest wisely you can beat the big institution investors to the punch.

When looking at small-cap investments it is important to keep in mind that even the biggest brand name companies once started out small. Google started in a garage. This potential is what makes small-cap investing so great. You could be aligning yourself, and your money, with the next big thing. These smaller companies have more growth potential than the larger corporations do. They can change course, make corrections, and stay up with market trend easier than the big guys. They will also garner less attention, which means that you can get a bigger piece of the pie.

Yes, the growth potential is huge, but you don’t want to put all your financial eggs in this one potentially high risk basket. Small-cap investments shouldn’t represent anymore than 10 percent of your investment portfolio, at the most.

Since small-cap stocks are risky there are a few things you want to make sure you pay attention to along the way. It is easy to get caught up in the dream of potential, and you want to play it smart.

• Don’t Lose Your Cool – What I mean by this, is don’t let something that seems too good to be true lure you in with the potential of big time returns. Small-cap investing is just like any other investment. You need to do your research, make smart decisions, and know exactly what you are getting yourself into. Don’t invest more money than you can afford and check all the avenues you make a decision. This will help you insure that your investment choice is sound.

• Don’t Jump on the Bandwagon – Just because you know a friend of a friend who made a ton of cash from a small-cap investment, doesn’t mean that you need to get in on the deal. Someone else’s success might not mean success for you. Tread carefully.

• Don’t Make Assumptions – This actually goes along with the last point too. When it comes to small-cap investing, or any investing for that matter, you always have to do your due diligence. You need to check out the balance sheets of the company and make sure that you are making a wise decision. It might seem like a great opportunity on the surface, but you need to look further than just skin deep.

• Don’t Think it Will Be a Quick Turn Around – Small-cap investments aren’t going to hit the jackpot in a few months. In fact, you are looking at a couple of years for this investment to pay off. Keep that in mind as you research potential investments and start looking at the details.

• Don’t Go Too Out on the Fringe – The very edge of technology is already a risky investment, when you add the potential risk of a small business you might be biting off more than your portfolio can chew. Stick to businesses that aren’t on the very fringe of the market and you will have a more secure investment.

I personally believe that small-cap investments should be a part of everyone’s portfolio, no matter what circumstance someone is in. The potential lies in front of you and it’s up to you to be able to identify the opportunity and decrease your risks involved. I hope this has helped you understand how small-cap (or even penny stocks) can give you the return on investment you are looking for.

Readers: What is your take on small-cap investments? Do you believe they should be a part of your portfolio? If so, which stocks have you bought? Thank you for reading, hope you’ve enjoyed!