Should Small Cap Penny Stocks be Part of your Portfolio
 

We can analyze stocks by organizing them by their market capitalization. Market cap is computed by multiplying the share price by the number of shares outstanding. For example, if a stock was trading at $75 per share, and it had 1 million shares outstanding, its market capitalization would be $75 million.

Remember that your portfolio should not consist solely of small cap penny stocks, but having penny stocks in your portfolio can really boost it as many times small investments can explode into big ones. 

1. High growth rates - Small cap penny stocks companies are usually in growth mode. Either they are selling a new product or service, or else they are well-established in a certain region and are looking to expand. This means that the stock price may appreciate a lot in the near future, as earnings and sales increase.

2. Less well-known and analyzed - Small caps penny stocks are usually not extensively followed and analyzed by Wall Street. Most of their outstanding shares are not owned by mutual funds, pension plans, and endowments. This means that the stocks have more chances to be inefficiently priced, thus giving small investors more opportunities for buying under-priced shares.

3. More risky - Small cap penny stocks are riskier than medium and large cap stocks because they may not have the stable cash flow, deep management talent, clout, and lines of credit to weather strategic mistakes and/or down markets. Since the stocks aren't heavily followed and analyzed by Wall Street firms, investors may not learn about bad news before the share price fully reflects the information.

4. Less insulated from stock market trends - Not only do small companies themselves lack the resources to resist bear markets, but investor behavior itself exaggerates the effects of market conditions. Investors are quick to jump out of small caps when the market turns down, and they are quick to jump aboard during bull market runs.