For Retail Investors, By Expert Retail Investors

What Are Small Cap Stocks and How To Evaluate

What is a Retail Investor?

A retail investor is an investor who is buying into the stock market for the long-term. Retail investors typically invest in low-risk stocks or indexes as their goal is to have their money perform over longer periods of time. Retail investors can be new and younger investors, but can also be seasoned and older investors who aren’t looking to play the “stock market game.”

Retail investors are not professional investors. They have their own brokerage accounts and are buying ETF’s, mutual funds, and other securities. In the short-term, the stocks and indexes they are buying into will not make them “rich quick,” but are good options for long-term money-making goals.

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What is a Small-Cap?

Small-cap is short for small market capitalization. The meaning of small-cap can vary on a broker-by-broker scenario, however, most small-cap businesses have a market capitalization of between $300 million to $200 billion.

Small-cap companies provide retail investors with a greater ability to have their money grow, as their market returns typically outperform large-cap stocks. The S&P600 along with the Russell 2000 are two indexes that include small-cap companies. It has been proven that these two indexes outperform large-cap indexes, such as the S&P500.

what are small cap stocks

A Breakdown of Capitalization Categories

Small-Cap

$300 million to $2 billion

Mid-Cap

$2 billion to $10 billion

Large-Cap

$10 billion to $200 billion

How to Evaluate Stocks to Buy in the Small-Cap World

Small cap stocks can be the best stocks an investor will ever own.

They offer greater growth and returns over the long run than any other major stock market sector.

Investing in small cap stocks, successfully, however, can be more challenging than just buying shares of the world’s largest businesses.

Dear Retail Investors has refined the four most important criteria to review when evaluating the quality of small cap stock investments.

Sectors: Which Ones are a Hit-Or-Miss?

Your belief in a sector cannot overwhelm what market consensus says is a bad investment right now. If there’s a sector that isn’t getting much love, don’t try to push a noodle up a wet hill.
Right now, sectors such as mining are running higher and higher, but not too long ago no one wanted anything to do with it. Mining stocks have been languishing for almost 10 years.
If you want to make money, invest in sectors that have momentum. A few years ago, investing in the cannabis sector was a smart play. Now, that sector is dead. Find sectors that are standing out, like technology and plant-based alternatives.

The Core Business: What Can You Learn?

What is the company’s business plan? What is their exit strategy? What does their revenue look like? How about their financial performance? It’s all about keeping an eye out and an open ear for what the company’s growth looks like.
You should see a clear path where you have the opportunity to get a return on your investment or see clear milestones towards a big event where you have the opportunity to sell your stock at a profit.

Cap Tables: Understanding the Company “Snapshot”

A cap table is a snapshot of the company that takes a look at how much stock they have out in the market, how many warrants and options there are, and what their cash position is at.
The point of a cap table is to look at all of the potential risks: warrant overhangs, high share count, low cash position, and who the top shareholders are.
Don’t forget to pull an ‘Insider Report’ and understand how much skin top management has in the game. And for an advanced report, take a look at what price management has paid and if their motivations are aligned with shareholders.

Long-Story-Short: Look Out For Yourself

Don’t fight the tape, look at companies in sectors that are showing momentum.
You have to look at the business itself: is there a potential to get big? Does the company have a plan?
Dear Retail is here to help you understand how cap tables can affect the future performance of stocks.
Dear Retail is here to help you dig into the past and the disclosure of who owns what stock at what price.
Dear Retail is here to help you follow the money and see what management is incentivized to do.
Dear Retail is here to help you make money.

What is an Antifragile Portfolio?

The word “Antifragile” comes from author, Nassim Taleb’s, book “Antifragile. Things That Gain From Disorder.” The meaning of antifragile is anything that isn’t fragile: china dishes are fragile, plastic plates are antifragile. Anything that benefits and survives from uncertainty is considered Antifragile. With investments, having an Antifragile portfolio is the key to making money. Retail investors benefit from having an Antifragile portfolio because the indexes, stocks, and mutual funds inside these portfolios are able to survive long-term from the fluctuations and uncertainties in the market. Unlike fragile portfolios—which are typically measured quarterly—Antifragile portfolios are long-term and reap benefits over longer periods of holding times.

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