Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 29)

Stocks (part E)

by

Charles Lamson

Small-Cap Companies

Small-cap stock characteristics are covered in the following sections of this post.

Light Trading Volume 

The vast majority of the small-cap companies are traded very lightly, if at all. Many may have no trading for weeks or months. This light volume makes buying and selling difficult and it is often hard to get pricing information.

Many of these small companies are publicly trading in form only. Quite often most of the stock is held by a handful of stockholders. At the bottom end of the small-cap section, it is not uncommon to find stocks with no trading on any given day.

JUST A MINUTE Small cap stocks often dwell in obscurity. Almost all of them that survive will remain small, many by design. Despite being publicly traded, many small companies are closely held, meaning most of the stock is owned by a handful of individuals, frequently family members. This is done so that if the company is sold, each family member who owns stock will receive a fair proportion of the proceeds.

Almost No Media Coverage

Except for those companies on the top-end of the small-cap limit most of the companies in this category dwell in obscurity as far as the national media is concerned. Many of these tiny companies never make any national news unless it is scandalous.

Almost no Attention from Analysts

At the very top of the small-cap range, you will find some attention from analysts and reporting organizations, but most of the tiny companies that make up the bulk of the small-cap sector never receive much attention.

This is understandable, since many of the companies may have virtually no trading activity during the year and are not the subject of any real investor attention.

Highly Volatile

The small-cap stocks, if they are actively traded, can be highly volatile. These companies are often extremely vulnerable in their market position and do not have the resources to ride out some of the rough spots.

PROCEED WITH CAUTION Small-cap stocks usually have no buffers against adverse market or competitive conditions. This makes them extremely vulnerable.

Because many small-cap stocks are thinly traded, any burst of activity is likely to send the price jumping.

Lesser-Known Index (S&P Small-Cap 600)

There are several indexes that follow small-cap stocks. The best known of these is the S&P Small-Cap 600 Index. This index really measures the activity of the upper end on the small cap scale.

The average market cap of the S&P Index is $544 million (as of November 23, 1999).

High Growth Potential, But Very High Risk

The small-cap stocks are ripe for explosive growth---or disastrous crashes. They live on the market bubble and any minute can plunge into obscurity or worse.

JUST A MINUTE Stocks with share prices under $2 are ripe targets for manipulation. Use caution when approached to invest.

 As we have already discussed, size matters when it comes to riding our market tides. Small-cap stocks are like small boats in the sea. When the sea is calm, they make great racers, but when the wind and waves begin to grow, it is time to look for life jackets.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 189-191* 

END

JUST A MINUTE

Small cap stocks often dwell in obscurity. Almost all of them that survive will remain small, many by design. Despite being publicly traded, many small companies are closely held, meaning most of the stock is owned by a handful of individuals, frequently family members. This is done so that if the company is sold, each family member who owns stock will receive a fair proportion of the proceeds.

PROCEED WITH CAUTION

Small-cap stocks usually have no buffers against adverse market or competitive conditions. This makes them extremely vulnerable.

JUST A MINUTE

Stocks with share prices under $2 are ripe targets for manipulation. Use caution when approached to invest.