What should you consider when investing in small companies?

Småbolagsinvesteringar är volatilt. Det är en av de första sakerna du bör veta och förstå. Så varför riskera dina pengar genom att investera i vad som vanligtvis anses vara riskfyllt? Först och främst – ökad risk är lika med ökad potentiell belöning. Det finns dock ett annat sätt att se på det. Att investera i risk kan faktiskt minska den totala risken för din portfölj. Så här fungerar det. Genom att diversifiera din portfölj till att inkludera instrument med hög volatilitet, måttlig och minimal risk tenderar den totala avkastningen att bli högre, vilket faktiskt eliminerar risken genom att öka volatiliteten.

Small cap investing is volatile. That’s one of the first things you should know and understand. So why risk your money by investing in what is usually considered risky? First of all – increased risk equals increased potential reward. However, there is another way to look at it. Investing in risk can actually reduce the overall risk of your portfolio. Here’s how it works. By diversifying your portfolio to include instruments with high volatility, moderate and minimal risk, the total return tends to be higher, which actually eliminates risk by increasing volatility. Small cap investments are defined as shares of those companies with a market capitalization of less than $1 billion (calculate market capitalization by multiplying the share price by the number of shares outstanding). Size matters when it comes to small cap investing. Ask yourself what is easier to do – double your money from $1 to $2 or double $1 million to $2 million. It’s a no-brainer. The same goes for businesses. Growth becomes more difficult once the company grows beyond a certain point, but the rewards of finding the right company in the early growth stage can lead to the kind of returns every investor dreams of. Use these quick tips when searching for small-cap stocks: – Understand the market. Yes – we’re saying it again for a reason. Fundamentals never go out of style and there are few places where this is more true than investing in small cap stocks. – Don’t believe in the better mousetrap theory. You know the old saying “build a better mousetrap and they will come.” The reality is closer to “imitation is the best form of flattery.” Before you bet the farm on the next new and improved technology, remember how much money it will take to get it to market – Stay involved with the company. Read and understand the company information itself. Who is at the helm? What is their previous experience? The best plans fall apart without proper guidance. Small company selection checklist Not sure what to look for when buying a small company? Use this small-cap selection checklist to make sure you cover the basics: – Performance. Look for an increase in current and annual income. Some investors will use a 25 percent increase in current earnings per share, but that’s heavily dependent on prevailing market conditions and industry averages. – Volume. Trading volume is crucial, especially when dealing with small cap stocks. Remember that to make a profit, you need someone who is willing and able to buy what you are selling. – Institutional sponsorship. Look for investments from funds and other large institutional buyers. – Growth. Read analyst reports for growth forecasts of 15 percent and up. – Revenue. Look for revenue or sales growth of at least 15 percent year-over-year change.

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