Sunday, January 30

Small Cap Stocks 2011

Online Stock Trading - Investing in Small Cap Stocks

Small cap stocks and shares can lead to big gains, i.e. 2000% in one year ! This explains why they are so
Small Cap Stocks to Watch
popular with small investors, but they are also of course riskier than large caps and if you pick the wrong small cap stocks then you may end up losing your shirt.

What are small cap stocks ?

The definitions of small cap stocks or shares vary, but generally speaking in the US a small cap stock is a company with a market capitalization of anywhere between $300 million and $2 billion, in the UK there is a small cap index and the market capitalization of the companies on it can be anything up to £350 million. The market capitalization is the number of company stocks in existence x the share price.

It is worth bearing in mind that small cap stocks make up around 20% of the US market, and beneath small caps you have two more categories - micro caps and nano caps.

In the UK in 2010 the small cap index rose 16% and the AIM (alternative investment market) index rose by 43%, while the large cap indexes rose by around 9%.

Small caps tend to do better when people (i.e. professional investors) are feeling more optimistic.

For an example of the gains possible with small cap stocks, consider Parkmead in the UK, if you invested in them last year then your investment rose by 2,714%, if you invested in Condor Resources then your investment rose by 2,429%.

I've just been listening to a podcast over at the Motley Fool where Maynard Paton was talking about small caps and saying that two small caps he has on his watchlist are Latchways (LTC) (safety equipment for the construction industry) and Fuller, Smith and Turner (a family run beer company which has increased its dividend since 1973 by a compounded rate of 13% !) both of which he considers too expensive at the moment, but he would be interested if they were to fall by around 30%.

Fuller, Smith and Turner 25 Year Shart - with 200 day moving average which the share price has been following since 2004

As mentioned above, small cap stocks involve a greater risk than larger caps so proceed with caution !

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