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How to Find the Right Microcap Stocks

Dec 18, 2010
If an investor wants to stay long in the business world, he needs to access the most reliable and up-to-date information. While most people pay attention to blue-chip stocks, some people would rather invest in microcap stocks instead. Not only is the overall investment much cheaper, but the chances to strike it big is also larger.

What's the caveat? Because of the lack of information out there, you can easily get duped if you listen to just about anyone. Investors who want to deal in smaller valued stocks must practice discernment and lots of them.

Here is the basic description of microcap stock companies. Microcaps are publicly-traded firms, which have small market capital and restricted resources. While we often hear about the companies with high market capitalization in the news, the truth is that most of the stocks traded in the United States are this variety. In fact, they often surpass the performance of big corporations in stock trading.

These stocks are the stocks issued by smaller companies. The typical company would have an average stock of US $6 million in net tangible assets while nearly half of the other companies would have less than $1.25 million. From here, we can see that this type of share is mostly low priced and deal with low volumes.

Typically, investors go to the OTC (Over the Counter) markets to invest in these. Pink Sheets and OTCBB are two systems where these stocks are normally traded. OTCBB (OTC Bulletin Board) is as quotation system that serves as a source of latest sale prices and quotes for many OTC securities that are not issued in the National Securities Exchange or the NASDAQ. Pink Sheets, meanwhile, have the price quotes for companies that trade actively in the OTC market. If you're an investor trading in OTC securities, then you should use the Pink Sheets for price inquiries and bid publishing.

Now that you have a basic understanding about microcaps, it is time for you to plan a good strategy to find your ideal stock. Initially, you should make a clear differentiation between these and other stocks found in the market. After that, you should balance the advantages and disadvantages of investing in these types of stocks. Historically, smallcaps are some of the unpredictable stocks to trade so make sure that you are aware of this.

Aside from this, you also have to search for the directory of stocks that lists this classification. Keep in mind that they usually use the OTCBB and Pink Sheets in the process of trading.

Most of all, you should do some research in the Securities and Exchange Commission (SEC). Companies are obliged to send periodic reports to the SEC when they are listed in the stock market. These documents are very useful if you want to identify the strong points of your potential investment. Finally, make sure that you do a quick check if the company you're eyeing to invest in has been involved in SEC suspensions due to their heavy advertising or possible fraud.
About the Author
The columnist of this article has found the creator of a PSSO by the name of Josh Yudell. In my opinion, Josh Yudell is a Wall Street veteran, having spent his entire career in the fields of investor relations and investment banking.
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