Small-cap investing can be a bit scary—if you don’t know what you’re doing. For some people, the temptation of high returns is canceled out by the inherent risks of investing in small, often little-known companies. I’m here to alleviate those fears!
I’ve written before about how to identify small-cap opportunities, but finding the best small-cap stocks is only half the battle.
The next step is successfully implementing your trading strategy and turning your small-cap ideas into profitable trades.
In other words, once you’ve found the small caps to invest in, what’s the next step?
Below is a five-step plan for successful small-cap investing. These are the same five steps in my Cabot Small-Cap Confidential advisory.
To learn how to become a Cabot Small-Cap Confidential subscriber, click here. In the meantime, enjoy this bit of free small-cap investing advice!
5 Steps to Successful Small-Cap Investing
Historically, small-cap stocks outperform the market. But small-cap stocks can be more volatile on the way up so it’s good to have a plan to help you focus on the end goal. Research and a disciplined investment strategy are key.
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1) Have a Plan:
a. You’ll be more comfortable—and more successful—investing in small caps if you follow a plan that covers:
i. What percentage of your portfolio will you invest in small caps?
ii. What is your time horizon?
iii. What are your profit goals?
iv. How much are you willing to be down on a position and for how long?
2) Buy with Discipline:
a. In general, buy when:
i. A stock’s price is reasonably steady, not surging or crashing
ii. Fundamentals suggest the stock is reasonably valued
iii. There is no known catalyst that’s driven excessive price appreciation
iv. You’ve done your research and understand the potential, and the risks.
3) Sell Losers with Discipline:
a. Generally, sell when …
i. Anticipated growth catalysts are unlikely to materialize
ii. Unanticipated negative events have changed the growth outlook
iii. Fundamentals suggest value traps
iv. Industry growth trends break down
v. A stock is down 25% to 30% from your entry point.
4) Sell Winners with Discipline:
a. Generally, sell when one or more of the following happens or is likely…
i. Anticipated growth catalysts have run their course
ii. Slowing growth appears unlikely to sustain investor interest
iii. A buyout offer has come from a company you don’t care to own
iv. The stock is up 50% to 100% (or more) and partial profits are warranted
v. The stock begins to break down and/or underperform its benchmark index.
5) Do Your Research:
It’s a simple fact: most small-cap stocks are so small that the big Wall Street firms don’t have analysts covering them. You’re on your own. And because a lot of small-cap trading happens based on rumors, personal hunches or insider information, there is often a big information gap. We can fill that knowledge gap, to help you base your small-cap investing on solid research, and fundamental and technical analysis. That’s how you make money in small caps!
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