How to Analyze Small Cap Stocks before You Invest

The only difference for investors between a small cap stock and a large cap stock is a few zeros in their numbers and the fact that you need to do more research with small caps. By sheer dint of size, small caps are riskier than large caps, so you offset the risk by accruing more information on yourself and the stock in question.

Plenty of information is available on large cap stocks because they’re widely followed. Small cap stocks don’t get as much press, and fewer analysts issue reports on them. Here are a few points to keep in mind:

  • Understand your investment style. Small cap stocks may have more potential rewards, but they also carry more risk. No investor should devote a large portion of his capital to small cap stocks.

    If you’re considering retirement money, you’re better off investing in large cap stocks, exchange-traded funds (ETFs), investment-grade bonds, bank accounts, and/or mutual funds. Retirement money should be in investments that are either very safe or have proven track records of steady growth over an extended period of time (five years or longer).

  • Check with the Securities and Exchange Commission (SEC). Get the financial reports that the company must file with the SEC (such as its 10Ks and 10Qs). These reports offer more complete information on the company’s activities and finances. Go to the SEC website and check its massive database of company filings at EDGAR (Electronic Data Gathering, Analysis, and Retrieval system).

    You can also check to see whether any complaints have been filed against the company.

  • Check other sources. See whether brokers and independent research services, such as Value Line, follow the stock. If two or more different sources like the stock, it’s worth further investigation. Check the resources in Appendix A for further sources of information before you invest.

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