How to select good small cap stock picks

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Small cap stocks are those stocks which have low market capitalization ranging from 1 billion dollars to as low as few million dollars. Each stock exchange has its own norms of identifying the low market cap stocks.Selcting a small cap stock which can give you good returns is not easy so read on regarding the things that you should be carfeul about while looking out for these stocks.

Things You Will Need

Annual statements of companies

Access to stock exchange website to get the latest information about the small cap companies

Step 1

The first and the foremost thing that you know when you select the small cap stocks is that these companies should have published annual results. Most of the small cap companies do not publish any results and are merely shell companies. Very little information is available for these companies in the public domain. This step in itself will help you determine the good small cap stock from the bad.

Step 2

Investing in small cap biotechstocks is easy. Check the filings with FDA. This will give you an idea as to which small cap stock can give you good returns later as and when they have the approval from FDA.

Step 3

If you do not have the time to research on your own then invest in small cap mutual funds to invest in stocks by proxy. Small cap mutual funds have been known to give very good returns as compared to blue chip stocks.

Step 4

Use the Russell 2000 as a bechmark index for measuring the returns of a small cap stock against the index. Another index that you can use is the Standard and Poors small cap index called as the S&P 600.
Invest in small cap stocks very carefully they are very risky. Always make sure that you have good amount of blue chip and defensive stocks in your portfolio.

Tips & Warnings

Beware of the pump and dump type of newsletters. These newsletters list out stocks which are worthless and you will invariably lose money by investing in these stocks.