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How To Spot Big Opportunities In Small Company Stocks

By Jason Markum

Investing in the stock market can be a challenge under the best of circumstances. But there is one area of the stock market that is often much more challenging than the rest…I’m talking, of course, about small stocks.

Why are small stocks so much harder to invest in than large stocks? There are a number of reasons. One reason is that small companies are simply untested yet. Management hasn’t yet proven that they can deliver growth and earnings. Another reason is that small stocks are often thinly traded making buying and selling the actual stock difficult and prone to large sways in price from high to low. This zig zag stock price movement can be psychologically hard for many investors to watch.

Even though it is a difficult sector to invest in, there are often great opportunities to make a killing investing in these small issues. That’s what I’m going to talk about today.

The first thing to understand if you want to play in this area of the stock market is that you are going to have to do much more of your own homework. Many times these companies aren’t being followed by the gig research brokerage firms and there are no analysts following the stock. All this means that you will have to crunch your own numbers most of the time…but then again, it’s important to run your own numbers anyway!

Here are some things to look for in a small company…

First, look for a 15% annual revenue growth. If a company doesn’t have at least that much growth going on, then the chances are slim that it’s stock price will go up dramatically in the years to come barring some strange unforeseen merger or new secret product line (unlikely). Dividends are also unlikely for a company at this stage of growth rate.

Next look for companies that have as large a market share as possible. I like to look for companies that have at least 20% market share. Small companies are prone to struggle with every economic downturn. Having a large market share is often times one of the only (if not THE only) cushion these small companies have.

Next look at their management team. Good management is absolutely essential. Large companies can some times get away with mediocre management at some levels, but small companies absolutely CAN NOT! Read up on the companies 10K and 10Q SEC filings. These will give you a good idea if the companies performance has lived up to the managements expectations or not. Also take a look at their 8K filings as this will show extraordinary management changes that have been made in recent times.

However you decide on a small company for your investment portfolio, one thing is for sure. Small stocks offer a huge upside potential if you can find a good company. Find a bad one though, and you can lose your shirt!

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