Micro cap stocks can bring you high profits
By Simon Chobod
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The cap, which stands for market capitalization, is calculated by multiplying the price
per each share by the total number of such shares issued.
That amount should represent the stock value of the company, as being determined by the market.
To calculate the total value of the company, we need to add to this figure the value of the company’s publicly traded bonds.
The companies with a market capitalization from $300 million to $2 billion are called small cap companies,
and the companies with a market capitalization from $50 million to $300 million are called micro cap companies.
The smaller the company’s cap is, the easier it is to manipulate its stock prices by buying and selling large amounts of shares.
Are all micro-cap stocks represent a risky investment? Some of them are and some of them are not.
Those are usually the companies at the beginning of their growth period, and their stock holds the potential
of appreciating many times over the years.
Let’s see an example. In 1962 Sam Walton opened his first Wal-Mart store in Rodgers, Arkansas.
He ran it as a private company for seven years, and in 1970 he began to trade its stock over the counter.
In the 1970s the Wal-Mart stock had a very thin market capitalization, which didn’t prevent it from being extremely successful.
It even paid dividends to its stockholders.
As the company grew, its stock eventually went through eleven splits. If you would invest a thousand dollars
in the Wal-Mart stock as late as in 1980, you would have half a million dollars sitting today in your account.
The buyers, who invested in the Wal-Mart stock in the 1970s, made many times more. This stock became an investing legend.
How can you find another Wal-Mart stock today? Sometimes you don’t have to look far,
it can be right in your neighborhood shopping mall. In the late 1980s, an aggressive retailer by the name
Target (TGT) started to open discount stores in the shopping malls across the country right next to Wal-Mart locations.
The newcomers were trying to beat Wal-Mart in their own game, and they were successful.
The Target stores featured prices just as low as Wal-Mart, yet once you were inside,
they provided more upbeat atmosphere and better fashions.
They were a discount retailer, but they behaved exactly as the higher priced shopping chains.
They had a modern interior d?cor, flashy promotions and they attracted younger crowds.
One felt better shopping at Target, it was a more positive experience.
In 1990 the Target (TGT) stock was still trading at micro cap rates.
If you had bought a thousand dollars worth of its shares in 1990, you would have today $50,000.
Big cap and even mid cap stocks are seldom capable of delivering 5000% gains to their investors.
Such gains are reserved mainly for micro cap stocks.
Every company, however successful in the future, starts small. The earlier in its growth cycle you manage
to buy its stock, the higher will be you earnings potential.
If you will ignore potentially successful companies just because
they have a thin market capitalization, you will be cutting out your most profitable investing venues.
Let’s ask again, aren’t micro cap stocks more risky as investments? Yes they are, but due to their low prices,
this is the portion of your portfolio, where you can afford to take risks.
It is preferable to take risks with $5 stocks, where you maximum loss is limited to $5 per share,
than with stocks that cost $100 per share.
We expect volatility, when we buy micro cap stocks. But we also expect huge potential rewards,
when we finally manage to find a winner.
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