How do we define a small cap stock? The typically recognized definition is often a stock who’s current market cap is between $250 million to $1billion. Unfortunately, that description does not reveal the reason penny stocks are so popular.

For the new investor, or even somebody that has a small stock portfolio, small cap stocks can appear to be the ideal investment decision.

Little Cash Investment

Since most small cap stocks trade below $5 (with several trading below $1 - hence the widely used phrase penny stocks), its simple to create a diversified portfolio of penny stocks. On the plus side, it does not take a lot momentum to make 50%-100% results. The downside - it does not take much to lose 50% of one’s portfolio if a person dumps their shares in a hurry.

The Next Big Thing

What people wouldn’t wish to have the ability to point out they got into the next big story - it is all about the bragging rights.

No Institutions

Nearly all mutual fund companies have rules set up that wont permit them to own stocks that trade over $5.00 - meaning you dont need to bother about an institutional investor getting rid of their shares, putting pressure on the stock price dramatically.

It’s All About The Size

Don’t forget - small caps are certainly not just something that trades below $1.00 - you will discover microcaps and even nanocaps that you can trade - be sure to keep in mind that they’re generally are illiquid - making it more challenging to amass a position, and more importantly, get rid of a position. You might confirm if they are also trading as a pink sheet - generally nanocap and microcaps stocks are priced at that level for a good reason: weak financial records - that is presuming they’re actually reporting them.

You’ll find somewhere around 1600 penny stocks to choose from - offering you lots of possibilities. That said, only 350 or so trade with a 50 day average volume of 500 000 - nevertheless, enough good choices. Take into account, penny stocks have over time outperformed large caps.

Some Caution

You might find that a number of penny stocks are not start ups - rather, are ex - large caps - avoid these former glory stocks - you really want organizations who not only have got a great plan, but have got an expanding client base (that obviously are spending money for the firm’s merchandise). Try to find growth rates that is at least 20% and at the very minimum, positive earnings per share.

Volume will continue to be the most significant challenge - keep to stocks in which the average daily volume is 500 000 so you won’t have to worry about dropping the bid price a lot whenever you sell for big gains.

Try to remember, no matter whether you call them small caps, nanocaps or penny stocks, most are high-risk opportunities and should only take up an extremely small part of your overall stock portfolio.