Posted on 23 January 2012.
The small cap index is often thought of as the black sheep of the stock market. It is overlooked by investors as being too risky and is scoffed at by financial advisers who promote only safe investments in large, stagnant companies. In truth, small caps are some of the most dynamic stocks on the market and they have earned investors some of the largest returns. Small cap companies represent a much larger portion of the market than either medium or large cap companies do. Although they have no set definition, small cap companies generally hold less than one billion dollars of market capitalization. This means that shares on the small cap index tend to be priced quite low, leaving a lot of room for appreciation. While many of these companies are new and lack a reliable financial history, their investment benefits often outweigh the risks any many investors make very lucrative returns for a very small cost.
The key to becoming a successful small cap investor is simple: knowledge. It is imperative that you understand what you are investing in if you want to be successful. Although the small cap index may offer less information up front, it is not impossible to research the companies in which you are investing. When you research a company, you want to look at three things: their history, their management and their product or services. Researching history may be difficult if a company is brand new, but even a very short financial history can give you insight into how a company will perform in the future. Additionally, you may be able to research individuals in the company and learn about their past ventures, successes and failures. Only once you understand the inner workings of the company should you invest in their small cap index funds.
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