How to Find Small-Cap Stocks + the Potential Benefits of Trading Them

small cap stocks

Let’s talk small-cap stocks. In life and career, 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.

Let’s get to it.

What Are Small-Cap Stocks?

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.

Penny stocks usually fall into the micro- or nano-cap category.

Small-Cap Stocks vs. Large-Cap Stocks

A large-cap company is one valued at between $10 billion and $200 billion. But size isn’t the only difference between small-cap and large-cap stocks. Here are some others…

Company stability. Large-cap companies aren’t up-and-comers. They’re established. They’ve been around for a long time, or they’re part of major industries. Large-cap companies are generally household names. Think Walmart, Disney, General Electric…

These stocks tend to deliver long-term and reliable but slow returns. They also generally pay dividends.

Rate of return. Small-cap companies can provide a quicker rate of return than larger ones. But they can be risky.

Why? Because they’re still growing. It’s possible that a small-cap company went public fairly quickly. Traders don’t have a long financial history to evaluate.

Without much data, it can be harder to determine trends and patterns. This can throw a wrench in your stock research.

Seasonality. Depending on the time of year, small-cap and large-cap stocks may perform differently. Small-cap stocks can be stronger early in the year, possibly because of something called the January effect.

Buying tends to rise in January. There’s generally a massive sell-off in December when traders ditch their loser assets so they can write them off come tax time. But in the new year, optimism is high. Many traders are willing to get in, try new things, and invest in newer companies.

But small-cap stocks can weaken as the year goes on. In the later quarters, it’s the large-cap stocks that tend to be stronger. They’re less likely to be sold during the December sell-off because they don’t tend to lose value.

Small-Cap Stocks vs. Mid-Cap Stocks

Mid-cap stocks are those valued between $2 billion and $10 billion. Mid-cap stocks are usually pretty solid companies, but they aren’t as well known as your Apples and Amazons.

Usually, mid-cap companies are former small-cap companies that have grown. They can attract buyers because they’ve proven themselves, and they have the potential to reach the big leagues.

Small-Cap Stocks vs. Penny Stocks

This is where things can get a little interesting…

The terms small-cap stocks and penny stocks are often used interchangeably. That’s wrong. While a lot of penny stocks are small-cap stocks, that’s not always the case.

A penny stock is anything that’s priced at less than $5 per share. It can be anything from nano-cap to large-cap, depending on its share price and the total number of shares.

Take Nokia (NYSE: NOK). Its share price is near $4, and its market cap is over $20 billion. Crazy, right? That shows you penny stocks can still be big companies.

But most penny stocks fall into the micro-cap or small-cap range. That’s why people tend to intertwine the terms. Be aware of the difference. A penny stock that’s also a large-cap stock wouldn’t be as volatile in the event of a catalyst.

Benefits of Trading Small-Cap Stocks

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There are benefits to trading small-cap stocks…

Trends Track the Larger Market

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.

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 thorough online penny stock guide. It’s FREE.

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

Say a big business like Amazon announces a new product. That might move the stock a little, but probably not a lot. Why? Because a million analysts already know about it. You’re not getting in on some undiscovered opportunity.

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 traders sift through all the market news to alert traders to the items that can supercharge stock moves. Grab your 14-day trial of StocksToTrade + Breaking News Chat to experience it yourself.

(Full disclosure: I’m an investor in STT and proudly helped develop it for the penny stocks I love to trade.)

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.

How to Research Small-Cap Stocks in 5 Steps

Ready to jump on the small-cap bandwagon? Here’s how I pick small-cap stocks…

#1 Technical Analysis

Technical analysis is what differentiates smart stock picks from random gambling.

By studying what a stock has done in the past, you can get a good idea of what might happen in the future. Often enough, stocks follow a similar trajectory.

As my Trading Challenge students know, I say I’m a glorified history teacher. I study the past so I can prepare for the future. That includes stock charts. 

By looking at a stock’s chart over time, I find patterns that emerge over and over. And once I’ve identified them, I’m better able to predict them and use them as cues for where to enter and exit trades.

That’s not to say it works every time. I’m not right all the time, and you won’t be either. This isn’t an exact science.

But often enough, stocks follow predictable patterns. By observing and pinpointing them, you can potentially learn to take advantage of them.

With small-cap stocks, it’s particularly important to get technical.

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#2 Fundamental Analysis

It’s probably obvious that I mostly focus on technical analysis. But fundamental analysis can be important too.

This is research into company reports and history. You’re looking for debt, financial health, and any potential catalysts that could affect the stock’s price…

Fundamental data can help you determine whether a stock’s a potential trade. Yes, you’ll need to know some finance basics. Check out this post on earnings reports for more on fundamental analysis.

Where technical analysis is all about numbers, fundamental analysis offers a little backstory about the company. So fundamental and technical analysis can work hand in hand.

#3 Use a Small-Cap Stock Screener

If you want to find top small-cap stocks, you’ll have to sift through the many available options.

StocksToTrade is my go-to stock trading and research platform. It can help you filter by market cap. It has 40+ built-in scanners, excellent charts, and more.

And its Breaking News Chat add-on feature can help you find the news that can move small-cap stocks fast. As I mentioned, this chat room is run by two market pros who alert members to hot news catalysts. It’s been a game-changer for my trading.

See for yourself why I use this feature every trading day — a 14-day trial of STT + Breaking News Chat is just $17.

(Reminder: I proudly helped develop StocksToTrade, and I’m an investor.)

#4 Follow Stock Indicators

When you’ve found a few small-cap stocks that you think have potential, let stock indicators be part of your continuing research. These can be the tiebreakers that help you choose one stock over another.

High Volume and News Catalysts

Watch for high volume and news catalysts when you’re looking for opportunities with small-cap stocks.

Volume is super important. You want enough shares traded daily to make it easy to get in and out of a position. You don’t want to be stuck with shares that don’t move!

High volume plus a great news catalyst is a winning combo. If there’s an earnings report, an exciting new hire, or something else going on with a stock that already has good volume — it might be a good time to make a trade.

#5 Look for Clear and Easy Patterns

Why make things hard on yourself? Don’t make monitoring stock charts more complicated than it needs to be! Focus on clean, easily identifiable patterns.

If you’re reviewing charts for small-cap stocks and can see no discernable pattern, move on. Don’t try to spot things that aren’t there. That’s magical thinking, and most likely it’ll cause you to lose money.

By trying to force a trade, you could miss out on a better opportunity. 

By finding good, clean patterns, you can potentially see the best for stocks you to trade.

Key Tips on How to Look for Small-Cap Stocks

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© Millionaire Media, LLC

Ready to be a big fish in a small (cap) pond? Here are some tips on how to look for small-cap stocks.

Create Your Own Small-Cap Stock Watchlist

A watchlist is a trader’s secret weapon.

My Weekly Watchlist

I’m a huge fan of watchlists and send them out to students in my Trading Challenge regularly. But I’ll never tell you to follow my picks. My watchlist is a starting point. Ultimately, I want you to be able to make watchlists yourself.

Sign up here to get my no-cost watchlist every Sunday.

Your watchlist is a small, manageable list of stocks that you’re considering. Keep it fairly small — it’s easier to monitor five stocks than 20 or 100. Especially if you’re still learning how things work.

You’ll keep an eye on your watchlist stocks to see if they meet your criteria. If and when they do, you can think about next steps for the trade.

Look at indicators and watch for chart patterns in volume, breakouts or breakdowns, or any change in the moving average.

Remember to track your stocks. Review them frequently so you don’t miss any important moves. You want to be ready when an opportunity presents itself.

Tim Grittani, who got his start in the Trading Challenge, has some tips on building a solid watchlist in this video…

Look for Small-Cap Stocks That Offer Growth

Small-cap stocks have the potential to grow a small account faster than large-cap stocks.

These stocks are more volatile, so there’s greater potential for big moves. That volatility gives these stocks their potential for short-term gains.

Never Chase Your Losses

There’s a strange thing that sometimes happens to traders in losing trades. Instead of recognizing that they’re losing and cutting their losses, they start chasing.

They tell themselves things will turn around. So they stay in trades way too long and might even pour more money into a loser. Big mistake!

Sometimes, the hard thing is also the right thing … It’s important to cut your losses quickly. It’s my #1 rule.

Cutting losses quickly is vital if you want to be a trader for the long term. If you can’t do this, your losses will quickly add up and you’ll likely blow up your account.

Before you even get into a trade, make sure your plan is clear about where you’ll cut losses. Then stick to the plan. Don’t get greedy, and don’t hope that things will turn around.

Don’t Trust Promoters

Marketing can convince you that you need something that you don’t.

Stock promoters are straight-up marketers. They aren’t trying to help you with the stocks they’re promoting — they’re trying to help themselves. Do NOT take them at their word.

I’m not saying that stock promoters are evil. But they’re self-serving, and this makes them biased. Do your own research. It’s worth the time and effort.

Never Stop Learning

This might be the best tip I can offer, no matter your trading approach.

I started the Trading Challenge because I saw a lack of valuable resources for traders. I learned how to trade the hard way. There were no day trading classes when I was starting out. So I want to make it easier for committed traders.

My Challenge allows you to speed up the learning process so you can start trading sooner with smart rules and a process.

Dedicate yourself to learning above all else. The market techniques will come in time. By creating a strong foundation, you’ll be able to continue improving and adapting to the market.

Top Small-Cap Stocks to Watch in 2021

small cap stocks top small cap stocks to watch
© Millionaire Media, LLC

Let’s go over some small-caps to put your radar for 2021. Remember, never buy stocks based on my alerts or anything I say! I want you to watch, study, and learn…

Naked Brand Group (NASDAQ: NAKD)

NAKD designs, manufactures, and markets intimate apparel and swimwear. The company’s brands are sold in department stores and online. Its market cap is currently around $600 million.

Is it part of a hot sector? Not exactly. But the stock tells a different story. Check out the three-month chart…

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Naked Brand Group 3-month chart with 1-minute candles — courtesy of StockToTrade

The stock had high-volume days for months. Near the end of January, it had its biggest trading day, and the stock shot up at the same time. Once stocks like this edge up near highs, and if they can break previous highs, they could keep going.

Stocks can have legs. Former runners tend to run again, and when stocks hold up, they can break out again.

Sunworks Inc. (NASDAQ: SUNW)

SUNW provides photovoltaic-based power systems in residential, commercial, and agricultural markets, mainly in Nevada and California. Its current market cap is around $450 million.

Take a look at SUNW’s six-month chart…

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Sunworks Inc. 6-month chart with 1-minute candles — courtesy of StocksToTrade

This is one good-looking chart.

Patterns like this are what traders look for. Study this chart so you’re better prepared when you see a stock that follows a similar pattern of consolidations and breakouts.

Are Small-Cap Stocks Riskier?

Small-cap stocks tend to be riskier than mid-cap or large-cap stocks. But there’s a much higher potential for quick returns.

I specialize in trading volatile stocks, but I’m still probably the most conservative trader there is. I’ve learned how to manage my risk and still take the meat of the move. Some of the stocks I trade move as much as 100%, sometimes much more, within a few minutes or hours.

I can help you learn how to manage risk in a way that fits your trading style. Get in my 30-Day Bootcamp if you’re serious about learning more about trading.

(Disclaimer: There is no guarantee that taking me on as a mentor will result in profits. Most traders lose. There will always be risks associated with trading stocks. Never risk more than you are willing to lose.)

Are Small-Cap Stocks for You?

Are small-caps stocks right for you? If you’re looking for big potential rewards, they might be. But make sure you’re meticulous on every trade, and always cut losses quickly if a trade goes against you.

Trading Challenge

Remember that most traders lose, and there’s no guarantee of success. But many top traders find their own strategies and success after they put in the time. Market tuition is real, but you may not have to pay as much if you focus on the process and your education first.

That’s why I started my Trading Challenge. I want to help traders shorten their learning curves with the rules I’ve learned in 20+ years of trading.

Think you have what it takes? Fair warning: it’s a lot of work. Apply to the Trading Challenge today if you’re ready to put in hours of studying to understand penny stocks. You can access my killer chat room, learn how to use the Sykes Sliding Scale, and so much more.

Small-Cap Stocks: The Bottom Line

Small-caps can be risky, but they can also offer great potential rewards.

Many factors make these stocks more volatile — and less appetizing to large investors and institutions. That’s fine by me. I love this niche. And I’ve made $7 million in profits trading it.*

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(*Please note: My results are far from typical. Individual results will vary. Most traders lose money. I have the benefit of years of hard work, dedication, and experience. Trading is inherently risky. Do your due diligence and never risk more than you can afford to lose.)

To me, it’s all about perspective and discipline. There’s potential with these stocks — but you must know the top rules to trade them safely.

What do you think about small-cap stocks? Share your comments and let me know!

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