Pick Up Caps

One of the most important terms in investing is "market capitalization". Each company is a kind of "ceiling". There are large caps, small caps, and even averages Microcaps. I will take into account the differences in a minute.

But first understand where the "cap" comes from.

When analyzing a company, the most important thing to consider is how much it is worth, or at least how much the market thinks it is worth. This is called market capitalization of the company, or "cap". Here's how it is understood ...

Say Company X has 100 million shares and a price of $ 12 per share. This would give it a market capitalization of 1.2 billion dollars. Market capitalization is simply the number of shares outstanding multiplied by the cost per share.

But the classification of company sizes is the key idea. For example, a large cap (market capitalization of $ 10 billion) may not grow as much and as fast as a small cap (100 million dollars to 1.5 billion euros). Certainly, a microcap (less than $ 100 million) can grow even faster, and an average capitalization (1.5-10 billion dollars) is somewhere in between.

Side Note [For our purposes, we will combine small and Microcaps ... So, while less than 1.5 billion dollars is a small cap.]

History sides with small caps. Rolf Banz made a famous study back in the 1980s called "The relationship between return and market value of shares." In this important report, Banz found that in 50 years and more he studied, more the company, the greater the average yield. This was true for all the years he studied, regardless of whether the market ended the year up or down.

Here are the exact results:



Table: "what has worked in investment" Tweedy, Browne Co.

As you can see, if you had invested in smaller companies during this period, you could have done about five times what you would if you had invested in blue chips.

That's why we love simplified small-caps. So why is it not called the detective in small caps? Well, we like to break it even further. Let me explain ...

Penny Stocks vs. Small Caps

Returning to our previous example.

Company X has a market capitalization of 1.2 billion dollars (100 million shares multiplied by $ 12 per share). It is a small cap company, but not a penny stock. Penny stocks are defined as something with a market capitalization of less than 1.5 billion dollars (and therefore, they are still small caps) and a price per share less than $ 10. So you can see the company X does not meet these two requirements. Therefore, we do not recommend it.

Now let's say company X has a fraction of 2-in-1 (meaning if you owned a share before the split you would own two after). Now there are 200 million shares, but the share price is only $ 6. That would make a "penny stock". It is now perfectly into our range.

So why we recommend that penny stocks? Well, there are a number of factors ...

First, there is the psychology of the labor market here ...

When some investors see $ 6 stock, they think it's cheap. This may not be the case. If she had the same market capitalization to $ 50 per share, the investor does not think that way. Thus, "penny stocks" Look considerably cheap compared to other small caps.

This is one reason. Another buying power.

With penny stocks, it is much easier to buy more shares and diversification between companies. Say you have 4 companies you are interested in buying, but only $ 100 to spend. If they are all $ 50 a pop, you can not do. Now if they all are $ 5 per share, you can enter all these posts. Thus, buying a diversified portfolio.

The third reason for picking penny stocks on the most expensive is the price itself.

If a company is sitting at $ 50 per share, it takes $ 5 swing.