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Small-cap Stocks You Can Start with Them

By Charles Hopkins Published 03/13/2006 | Finance

Small-cap stocks do not involve large amounts of money, and can avoid very high risk at initial stages. Even if you lose, you lose a small amount. Hence starting with small caps is not a bad idea.

Small-cap stocks are stocks with a relatively small market capitalization. Classifications such as 'large cap' or 'small cap' are only approximations that change over time. In fact, the definition of 'small cap' can vary among brokerages, but generally it involves a company with a market capitalization of between 300 million and 2 billion.

Below this, companies having a market capitalization between 50 million and 300 million, are called 'micro cap' stocks.

Even these aren't the smallest breeds. Nano-cap stocks are even smaller, and involve small public companies having a market capitalization of below 50 million. You may start with these also. But they escape the state regulatory oversight and there is no point in sticking to them.

The methods of learning the stock market apply to wider situations when you come out to penny cap, mid cap and large cap stocks. With rational research, dependable brokerage and your own attentive analysis, it is actually beyond the small cap stocks that you start exploring long-drawn high-return potentials.

One of the biggest advantages of initially investing in small-cap stocks lies in the opportunity to beat institutional investors. The institutional investors are not allowed below a certain minimum value quite high in relation to small cap stocks. Hence it is possible to avoid quite a few legal constraints while keeping up watchful learning of the pitfalls.

Secondly, it is good to initially trade in these stocks because you may want to put in small money in expectation of relatively high returns. If this is the case, case you must get to know the companies they represent thoroughly, before you take a single step.

The stocks that are traded at extremely low prices, sometimes even for under 1, may be considered small caps by nonstarters. In that sense even penny stocks are small cap stocks. But actually the term officially refers to low-capitalization companies ranging over a specified capitalization value.

And you have to be on the alert, small cap or not. Though traded at very low prices, they can be quite risky. Brokers and analysts often have cautioned about sudden unprecedented rises in the prices of small-cap stocks in recent times.

Most brokers dealing in this category do not have strong financial credentials. There are informal brokers also who come to help you. You get them in the neighborhood of the trading spot. They often look for you. Careful! As you are a beginner, you may easily be cheated. As these brokers do not have to abide by any authority control, frauds are rampant.

However, wise financial investors avoid them and their wares, though it is fully possible to make a profit in this market.

Another source of the high risk of this market is the wildly fluctuating prices. Hence the first tip is: try not to go on investing in these stocks for too long.