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Have you ever wondered what the experts mean when they talk about investing in smart cap stocks? Simply put, smart cap stocks means smart investing in small cap and micro cap stocks. For the sake of convenience, it is collectively called as smart cap stocks.

So what are small cap and micro cap stocks? Small-cap stocks are stocks whose total capital value ranges from 0 million to billion. Micro cap stocks are stocks that have a market capitalization of less than 0 million. The main difference between smart cap stocks and penny stocks is that penny stocks are worth less than whereas many of these smart cap stocks can be more than .

Although smart cap stocks can be traded on any stock exchange, they are mainly listed in NASDAQ and Over-the counter(OTC) exchanges because of the lenient listing rules in these exchanges.

Advantages

Though smart cap stocks are not given their due attention, this does not mean they are poorly-managed companies. There can be many undiscovered gems in this lot. The advantages of smart cap stocks are:

Growth potential: Small companies have more potential to grow when compared to large companies. The giants of today like GE, Microsoft and Walmart have all evolved from small start-up companies. These smart cap stocks can double in value when the company does the right things.

Opportunity for individual investors: Mutual funds are institutional investors who tend to buy shares worth hundreds of millions of dollars. They usually do not buy shares in small companies because these companies do not have much market capital. So, this is an opportunity for individual investors. The institutional investors will buy these stocks only after they have grown to a substantial size. If the individuals can get in early, then they can reap huge profits.

Improper pricing: Most of these smart cap stocks, because of their small market capitalization, do not get much attention from Wall Street. When they are so under-reported, there is a high possibility that they may be priced improperly. More often than not, they are under-priced. These companies will be worth more than the price at which they are traded. Individual investors can profit from these discrepancies.

High Rate of return: The huge growth opportunity available for these smart cap stocks enable them to give very high rates of return over a period of time. The table below from Morningstar and money-zine throws more light on the growth and rate of return of smart cap stocks:

Stock Type 3 yr return 5 yr return

Large Growth stocks 9.00% 10.33%

Mid-cap Growth 11.15% 13.88%

Small Growth 8.25% 13.26%

Large Blend 8.65% 10.70%

Mid-cap Blend 9.00% 13.97%

Small Blend 7.04% 14.06%

Large Value 8.25% 11.52%

Mid-cap Value 8.46% 13.99%

Small Value 5.34% 13.23%

From the above table, we can infer that small stocks tend to give higher rate of return over a longer period of time. This reflects their growth potential.

Disadvantages

Smart cap stocks have their negative side too. The disadvantages are:

Higher Risk: The primary disadvantage is the high risk associated with these stocks. They are expected to grow well, but sometimes, they may not have the required capital to weather big storms in the market. This is a flip side to smart cap stocks.

Time and Energy: It requires a lot of time and energy to identify these stocks. They are not easy to find and a lot of research is required.

Lack of information: There may not be enough information available about these companies’ earnings and forecasts. Media and most of the investors are concerned only about the big stocks and so these small companies will be mostly ignored.

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Pros and Cons of Investing in Penny Stocks

Pros and Cons of Investing in Penny Stocks

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Home Page > Finance > Pros and Cons of Investing in Penny Stocks

Pros and Cons of Investing in Penny Stocks

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Pros and Cons of Investing in Penny Stocks

By: Penny Stocks

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Penny Stocks and penny stock investment tool at <a href=”http://www.pennystockrumble.com”>penny stocks</a>

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Article Source: http://www.articlesbase.com/ – Pros and Cons of Investing in Penny Stocks

Most penny stocks are shares of small companies that usually don’t have great market penetration.The main difference between stocks and larger stocks is that they fluctuate enormously on a daily basis. When you decide to invest in the right small or large cap company, make sure you limit your order. While the OTCBB does require companies to file timely documents with the SEC, the pink sheets have no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies. Penny Stocks on the OTCBB and pink sheets do not have to fulfill minimum standard requirements to remain on the exchange. Stocks are not found in the typical markets that most stocks in your portfolio might be, such as NASDAQ, NYSE and AMEX.

The SEC defines penny stocks accordingly: The term “penny stock” generally refers to low-priced (below ), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board or in the Pink Sheets, they may also trade on securities exchanges, including foreign securities exchanges. In addition, stocks include the securities of certain private companies with no active trading market.

Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer’s account.

Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.

Since pennystocks are traded outside the main markets, there’s a lot more room for investment from experienced and inexperienced investors. Penny stocks really help you develop a greater understanding of how the market works, from the very finite details and inner workers of the trading counters. Identify what type you want to invest in, micro cap, small cap or large cap companies. These terms relate to the amount of capital each of the companies have, and is a great way to gauge new opportunities or growth patterns. There may be a good place for penny stocks in the portfolio of an experienced, advanced investor, however, if you follow these steps.

Have you ever heard the phrase “the trend is your friend”? Well, with trading penny stocks, identifying trends through technical analysis and buying and selling according to that trend, can prove to be very profitable. Small cap stocks are loosely categorized companies with share prices of below and with market caps of under 0 million. They are sometimes referred to as “the slot machines of the equity market” because of the risks involved. In basic terms, with trend trading, you buy a stock when it is trending up and sell as soon as it reverses that trend or conversely when shorting the stock you short sell it when trending down and cover your position at the point it starts to recover.

Regardless of your definition the point of penny stocks is your trading lower valued companies that have less information because the company isn’t required to have independently audited information and is never covered by a stock market analyst because virtually no one would read about it or pay for the information.

As penny stocks are not traded on the main markets, it’s important to find a trusted broker or side exchange market to facilitate the purchase of stocks. In order to be truly effective as an investor, you must understand the ‘bid and ask’ price connection. The difference between the bid (real) and ask (selling) price is called a spread and is the base in which you will calculate your earnings. This is particularly important as stocks are sold by estimated values versus a single unit price. It is wise to install a stop-loss tactic and protect your capital with prudent exit strategies. This is both high risk and high reward. So, it’s very important to know what you’re doing, and listen to the experts.

And therefore carries a greater risk than your average large stock investment, however, with the potential to make a lot more money. For example, if a stock only cost 10 cents, a 1 penny increase would push a 10% gain.Typically, these types of stocks are sold for or less, in most cases

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