At this point, you may be familiar with a few different stock market investment strategies. Classics like “buy low, sell high” work universally, but what about more focused approaches such as microcap investment?
When you boil down any strategy, you’ll find that investors conduct thorough research before making any moves. No matter the strategy, you must do your homework before putting money into stocks. And now’s the time to do some research of your own.
Find out if the microcap investment strategy can earn you a profit in 2021 and beyond. Your first step is understanding stocks and investment and learning the advantages and disadvantages of the microcap strategy.
Understanding the Stock Market and Investment
If you plan on playing the stock market game, you must familiarize yourself with successful strategies investors use.
A successful investment strategy doesn’t always churn out an immediate profit—it often takes time and thorough research.
Since you don’t have the same resources as the big-time investors, you’ll need to do even more research into stocks and investments.
Dear Retail is a great place to start learning about investment strategies out there for you to take advantage of, such as microcap investment.
Remember that the key to any investment strategy is knowing the potential outcomes of your investment. This especially rings true for a microcap investment strategy.
What is a Microcap?
Before we get into the advantages and disadvantages of microcap investment, it’s helpful to know what microcap refers to.
A microcap refers to a publicly-traded company with a market capitalization between approximately $50 million and $300 million.
Market capitalization is the total value of all of a company’s share of stock. Knowing a company’s market capitalization helps investors understand the size of a company before investing.
Microcaps are slightly larger than nanocaps but smaller than smallcap, midcap, largecap, and megacap corporations. When you invest in a microcap, you’re investing in a small and often more volatile company.
However, don’t be fooled—a company’s market capitalization does not directly relate to its stock price. A microcap investment strategy could lead you to a fortune but has the potential to be a disaster as well.
Understand the risks and rewards of microcap investment before diving in.
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Advantages of a Microcap Investment Strategy
So you’re probably thinking, “what could be advantageous about investing in a microcap?”
Well, the microcap investment strategy has several advantages you can cash in on. For one, microcaps take advantage of a theory called the small-firm effect.
The small-firm effect theory states that smaller companies’ stock, or market capitalization, outperforms larger companies’ stocks.
This could be due to two reasons: small companies have more growth potential and typically lower stock prices.
Think about it this way, a small or microcap has more potential to double or triple in size than a company like Amazon.
Along with having a higher growth ceiling, a microcap’s stock tends to be cheaper as well. So if you’re spending less per stock, you have a greater chance of a larger return on your investment.
Combine the price you pay for the stock of a microcap with its potential to grow, and you could be looking at some incredible returns.
Their Negligence Is Your Advantage
Another advantage to the microcap investment strategy is that analysts and big stock market players tend to overlook microcaps.
With the absence of analysts and their speculation on a company’s value, the lines between risk and reward blur. And since analysts won’t touch it, the big players who rely on their analysis tend to follow suit.
This gives you, the independent researcher/investor, an opportunity to jump on a microcap and turn your small investments into something greater.
Of course, that’s if the microcap you invest in actually pans out. That’s part of what makes microcap investment such a high-risk, high-reward investment.
Are There Any Disadvantages of Microcap Stocks?
As you can imagine with any investment strategy, microcap investment has its disadvantages. Two of its major drawbacks are that they tend to be high-risk investments and are vulnerable to fraudulent schemes.
The biggest issue with microcaps is that they tend to be high-risk investments. Since microcaps are smaller companies and commonly start-ups, they have a greater chance of going under.
With a microcap, you’ll need to do much more research into various aspects of a company before making your investment. This will take time and work—luxuries that you may not always have.
As said in the advantages section, there’s little to no microcaps analysis, so you have nothing to fall back on but your own due diligence.
Another major disadvantage of microcaps is that they are vulnerable to pump and dump schemes.
In a pump and dump scheme, investors will create buzz on a certain stock. This triggers a buying frenzy with the ultimate goal of driving up the stock’s price.
Once the price is nice and fat, investors holding it then sell or dump the stock and cash in on the inflated price.
Unfortunately, these schemes are often found in new start-ups. That’s why researching and reading about microcap investment matters.
How To Invest in Microcap Stocks
After considering all of the above information about the microcap investment strategy, your next step is to start investing.
Before diving into the first microcap you come across, remember how vital it is to do your research. The prices on microcap stocks tend to be cheaper but only bite off what you can chew.
In other words, make sure that a loss on that investment is not a major blow to your finances. On the flip side, if that stock outperforms, you could be looking at a nice gain.
The number one factor here is you. How much time are you willing to dedicate to researching a microcap’s growth potential or profit margin?
Ultimately, a microcap investment strategy is the epitome of high-risk, high-reward. Don’t be discouraged by the risks; research before investing a single penny.
On the other hand, don’t be lured into a risky investment just because you know the reward could be great.
Do everything you can to eliminate the risks of falling into a fraudulent investment by staying well-read on smallcap and microcap investing.
Where Can You Learn More About Microcap Investing?
Whether it’s learning the difference between smallcap stocks and microcap stocks or what stocks to invest in 2021, Dear Retail has the answers.
Dear Retail investors are part of a community of like-minded investors who navigate the smallcap market. Click here to stay up-to-date with the latest micro-cap market news to help you become a smarter investor.