When it comes to the stock market smaller doesn’t usually mean better – except in the case of microcap stocks.
It may surprise you to learn that microcap stocks have historically outperformed their larger counterparts. Microcap stocks are companies with market capitalizations of between $50 million and $300 million.
A detailed review of American stock market records stretching from 1926 to 1996 found that the smallest quintile (a group which includes
microcap stocks) outperformed the largest quintile by 4% a year.
The review was conducted by Jeremy J. Siegel, a professor at the Wharton School of Business, and reported on in his book entitled “Stocks for the Long Run.”
Here are two more advantages of microcap stocks:
- Because microcap stocks are generally not included in index funds or directly related to large stocks, they may offer refuge from broad market volatility.
- Microcap stocks are also often not reviewed by analysts, which creates an opportunity for value investors to investigate stocks thoroughly and uncover potential undervalued gems.
One thing to keep in mind though when deciding whether or not to invest in microcap stocks:
While these stocks may offer safe haven from broad market volatility, they are not immune to volatility themselves.
In fact, microcap stocks can experience significant individual volatility due to a variety of factors. Those factors include poor liquidity, fraud, poor business planning, lack of resources and limited exposure.
So be sure to do your research
If you do decide to invest in microcap stocks, it is very important that you do your due diligence and investigate companies thoroughly. Keep in mind this can be difficult to do because there are not many analysts involved in this sector. Also, the amount of information available on a company is often very limited.
However, by putting in the work you may be able to uncover a real diamond among the coal. And if you are able to do that you could see significant profits in the future. Particularly, as a company establishes itself and moves forward.
Companies ranging from Ford Motor Company to Sirius XM to Monster Beverage Corp. to Fannie Mae/Freddie Mac at one time traded as micro cap or “penny stocks.”
Who knows there may be a microcap stock right now that could break out and join this list of distinguished companies. We invite you to start using the information at this site to find it!
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