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Investing in Small-Cap Stocks

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Written by Timothy Sykes
Updated 9/16/2023 17 min read

A small-cap stock is stock in a company whose total value is below $2 billion. Even though these stocks can be risky, they can also lead to quick profits with a high percent gain.

In life and business, most people want to think big. But in the stock market, sometimes it pays to think small.

When you buy stock in large, established companies, you may profit over time … But that can take months or even years.

If you want to grow your account faster, consider trading stocks with more volatility. Small-cap stocks can offer greater (and quicker) returns. But you have to manage your risk, trade with a plan, and stay disciplined.

In this post, I’ll introduce you to small-cap stocks — what they are, how to find them, and how you can learn to trade them.

If you want to check out the small-cap stocks I’m watching, feel free to skip ahead.

Understanding Small-Cap Stocks

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Market capitalization, or market cap, is the market value of a company’s outstanding shares. It’s an important metric for traders — it’s a way to gauge a company’s size.

Figuring out market cap is easy. Multiply the total number of shares by the current share price. So if a company has one million shares trading at $5 each, the market cap is $5 million.

Knowing a company’s market cap can help you with your technical and fundamental analysis. It can be a useful way to filter stocks to see which ones might be interesting. It can also help you add diversity to your portfolio.

So what’s a small-cap stock?

A small-cap company is one with a market cap between $300 million and $2 billion.

If that sounds pretty large, that’s because it is. But a mega-cap company might have a market cap of $200 billion or higher. Compared with that, the small-cap company is small potatoes.

It’s important to understand how they stack up against their larger counterparts. Large-cap stocks, for instance, offer stability and are often industry leaders. Want to understand the differences better? Here’s a comparative analysis of large-cap vs small-cap stocks.

Penny stocks usually fall into the micro- or nano-cap category, which is everything below the small-cap cutoff.

Benefits of Trading Small-Cap Stocks

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Small-cap stocks offer numerous benefits, from high growth potential to less competition. But day trading them isn’t the only way to go about it. Swing trading, which involves holding stocks for days or weeks, can also be a profitable strategy. It allows you to take advantage of short-term trends while avoiding the stress of day trading. Interested in this approach? Dive into this detailed article on swing trading strategy.

Both strategies take advantage of these benefits…

Trends Track the Larger Market

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You can potentially benefit from the same global trends that affect large-cap stocks. You can look at trending sectors in the large-cap world and see if there are similar opportunities among the small caps.

The information is more easily available for bigger businesses. Their activity is tracked, any change in major shareholders is reported, the source of advice on their moves is usually more trustworthy.

Opportunity for Individual Traders

Large-cap stocks are better known, but there can be plenty of trading opportunities with small caps.

Many big investors think small-cap stocks are a waste of time. They also turn up their noses at penny stocks because they’re too volatile and risky.

That higher volatility is what I love about these lower-priced stocks. It’s all about your strategy. Don’t know where to start?

Check out my FREE online penny stock guide.

Room for Growth

The smaller the cap, the more room there is to grow.

Small-cap stocks are generally lesser-known companies. But they stand to grow their revenue and earnings over time. If they do well, demand for their shares will grow.

If you can be ahead of the curve, you may benefit.

Less Analyst Coverage

A product launch for a small-cap company can have a much bigger impact on the stock price. But since smaller companies don’t get as much analyst coverage, it’s up to you to discover these opportunities.

Unless you use a smart tool like StocksToTrade’s Breaking News Chat. Two Wall Street analysts sift through all the market news to alert traders to the items that can supercharge stock moves. This is a tool I use — and it’s also one I helped to design.

Get 14 days to see the difference StocksToTrade + Breaking News Chat make for your trading — only $17!

Takeover Potential

Big companies move slowly. When a large company wants to expand, it’s often easier and quicker to buy a small-cap company instead of starting a new division or product line.

That means potential opportunities for traders … A small-cap company’s stock can jump on news of an acquisition. Just be prepared with a plan. I wouldn’t hold and hope with these kinds of catalysts.

Top Small-Cap Stocks to Buy Now

Let’s go over some small-caps to put on your radar for 2023:

  • (NYSE: AI) — C3.ai, Inc. — The AI Sector Leader Small-Cap Stock
  • (NYSE: BBAI) — BigBear.ai Holdings Inc. — The AI Sympathy Play Small-Cap Stock
  • (OTCQB: NLST) — Netlist, Inc. — The Samsung Lawsuit Winner Small-Cap Stock
  • (NASDAQ: TIO) — Tingo Group Inc. — The Former Runner Small-Cap Stock
  • (NASDAQ: RIOT) — Riot Platforms Inc. — The Bitcoin Sympathy Small-Cap Stock

Before you send in your orders, take note: I have NO plans to trade these stocks unless they fit my preferred setups. This is only a watchlist.

The best traders watch more than they trade. That’s what I’m trying to model here. Pay attention to the work that goes in, not the picks that come out. Soon, you’ll be able to make your own lists.

Subscribe to my NO-COST weekly stock watchlist newsletter here!

#1: C3.ai, Inc. (NYSE: AI) — The AI Sector Leader Small-Cap Stock

My first small-cap stock pick is C3.ai, Inc. (NYSE: AI).

In April 2023, AI broke down through the $20 support it had been holding for nearly three months…

That puts it back in small-cap range, and puts it in my sights for my favorite pattern:

Understand — I’m not telling you to buy and hold the dip…

When a stock like AI panics on news like its recent analyst downgrade, it often results in a bounce.

When the stock doesn’t bounce, I cut my losses. But if AI is headed for a price correction, there will be plenty of trade opportunities along the way.

I’m not predicting a collapse. AI stock is the AI sector leader. The future of the sector is bright.

I’m not predicting anything, I’m just reading the chart. Take a look at AI’s spike in early April. Former runners can run again.

#2: BigBear.ai Holdings Inc. (NYSE: BBAI) — The AI Sympathy Play Small-Cap Stock

My second small-cap stock pick is BigBear.ai Holdings Inc. (NYSE: BBAI).

I prefer to trade penny stocks to higher-priced stocks like AI. A penny stock sells for under $5 a share.

Although it broke out in February 2023, BBAI is back in penny stock land as of April.

I think penny stocks are better for small account traders. They tend to move more than higher-priced tickers. Their percentage gains are greater.

Traders know this. When a higher-priced ticker is moving, many will gravitate toward a lower-priced ticker like BBAI. That’s what makes it a sympathy play — it benefits from sector momentum, even if it has no catalyst itself.

I’ve got a warning for you as well — this young sector doesn’t bounce as well as other sectors. I found that out when BBAI fell past its support on the back end of a spike. This lesson cost me $5,584 (starting stake $87,381).

I’m transparent about my losses because knowing how to lose is half of trading…

Even though I kept my percentage loss small at just over 6%, it was still a hugely undisciplined trade. I chased.

I’ve learned to be a bit more careful with AI stocks. It’s a new hot sector, and the market doesn’t know how to value it yet.

I’m watching BBAI for A+ setups, and won’t trade it again until I see one.

#3: Netlist, Inc. (OTCQB: NLST) — The Samsung Lawsuit Winner Small-Cap Stock

My third small-cap pick is Netlist, Inc. (OTCQB: NLST).

In late April, NLST won a landmark case against Samsung for patent infringement. This goosed its share price up 40%…

But if you look at its chart, NLST’s real gains came earlier in 2023. It gained more than 250% in the year’s first four months.

I’ve traded this ticker for $6,238 in total profits (click the link to see my individual trades). A big chunk of those gains came off a spike three years ago — after NLST won a lawsuit against Alphabet Inc. (NASDAQ: GOOGL)!

Former runners can run again — especially if they get the kind of tasty news that NLST is prone to.

#4: Tingo Group Inc. (NASDAQ: TIO) — The Former Runner Small-Cap Stock

My fourth small-cap stock pick is Tingo Group Inc. (NASDAQ: TIO).

Speaking of former runners, let’s take a look at TIO. It had three big runs in 2020 and 2021, then fell below the $1 mark for most of 2022.

It had a 100% run toward the end of 2022, then tried to break through resistance again at the start of 2023.

In April, it ran again on earnings — then broke out to 2021 levels after it announced that it had regained compliance with Nasdaq’s minimum bid price requirement.

This is a stock that wants to run. I’d go so far to say it was born to run. But it’s also shown it can collapse just as quickly.

This is good for us traders.

Whether we’re trading an uptrend or a downtrend, we need movement. That gives us the freedom to take singles as it moves around the chart.

#5: (NASDAQ: RIOT) — Riot Platforms Inc. — The Bitcoin Sympathy Small-Cap Stock

My fifth small-cap pick is Riot Platforms Inc. (NASDAQ: RIOT).

But it might not be a small-cap for long…

We’ve seen this film before. RIOT got all the way up to $71 in 2021…

In April 2023, it was back under $12. Like fellow bitcoin miner Marathon Digital Holdings Inc. (NASDAQ: MARA), its fortunes are tied to that of the biggest cryptocurrency.

But check out the charts. While bitcoin gained 79% from January–April 2023, RIOT gained almost 250%! MARA was up just over 200%.

This goes back to the reason I watch small-cap stocks. Bitcoin is unique for the amount of movement it has as a higher-priced asset…

But it still can’t compare to similar assets that have a radically lower bar to entry.

RIOT might continue to climb higher. Or it might fall, or consolidate.

Either way, it’s worth watching.

Best Value Small-Cap Stocks

Some traders want the best of both worlds — value stocks with a small investment.

First, I want to tell you that this isn’t my trading strategy. The premise of value stock investing is keeping your money tied up in a supposedly “safe” stock.

No stocks are “safe.” If you want safety, get a CD from your bank.

Moreover, the rate of return promised by value stocks will only keep large account holders content — those of us with day jobs and credit cards to pay off will probably want more than 10% annual gains.

That said, it doesn’t hurt to check out a different approach than the technical one I use most…

Value trading relies on a certain amount of fundamental analysis. While I’m a believer in the fact that “only price pays,” there are some tricks to be gleaned from the value camp.

One of the big problems in the small-cap world is the fact that too many of these companies are scams. As you dip below the $1 billion threshold, the scammers get more brazen.

The Russell 2000 Index features some of the more legit tickers. There are even ETFs based on its list.

When you’re doing your research, you can check things like management, performance compared to industry peers, or even nerdy data like price-to-earnings ratio (EPS).

Strategies for Trading Small-Cap Stocks

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My strategies for trading small-cap stocks differ from the ones for trading large-cap stocks

Trading small-cap stocks requires a specific approach. Day trading is one such strategy that can be particularly effective with these volatile stocks. It involves buying and selling stocks within a single trading day, capitalizing on short-term price movements. Want to master this approach? Check out this comprehensive guide on day trading strategy.

Small cap stocks tend to follow patterns better. That’s why I developed my 7-step penny stocking framework…

Of course, we might be getting ahead of ourselves. Before you even think about trading, make sure you have the following pieces in place:

  • Watchlist: A good stock screener like StocksToTrade will help you build your watchlist. You want to find one which has the right tools for stock analysis, integrates with a lot of brokers, and works for beginners as well as it works for experts — like StocksToTrade.

Take a look at the stocks I’m watching this month here.

  • Knowledge: You have to know what you’re looking for. Study chart patterns by yourself or with a mentor, like in my Trading Challenge.

Apply to join my Trading Challenge here!

  • Trading plan: Never trade without a plan! This is the only way to maintain discipline in trading. The path of no discipline leads to random trades and overtrading, snowballing greed, and eventually BIG losses.

Factors to Consider Before Purchasing Small-Cap Stocks

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Here are some additional considerations before pulling the trigger…

  • Partnerships. It helps to have the backing of venture capital firms or other funds. Big name shareholders can also move the needle.
  • The macro-economy. Consider factors like interest rates and other economic factors — even the price of crude oil and mortgage rates can affect the markets.
  • Equity. Things like dividends, technology rights, forthcoming products and services, and sales predictions can all be part of the value picture.

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (205) 851-0506 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”