A small cap stock, or micro-cap stock, is a stock with a pretty small amount of market share. The term small cap makes reference to the market capitalization of a business. These numbers can vary, but small caps are usually companies with a market capitalization between $200 million and $2.5 billion. As a side note, don’t confuse small caps with micro caps. Micro cap fund and mutual funds; for example, invest in companies with a market capitalization of $50 million to $300 million.

If you do want to buy some of these small cap stocks, there are a few things you should look out for.

The first of these is basically newsflow. If you're serious about uncovering a few hidden gems then you need to keep up with all the various company updates that are constantly being released. This will enable you to find a few companies that are reporting good profits and are confident about their future prospects.

It's very often these news announcements that drive the share prices of these smaller companies so you also need to not only read all the various news announcements but you should also look at the reaction to this news. If it causes a flurry of buying activity, then you may want to investigate this company further.

Similarly a related factor is volume. Many financial data providers will provide tables showing companies that have seen abnormal volumes in recent days. This basically tells us that there could well be some important news being released in the very near future (good or bad) that may have been leaked beforehand. It could also be a result of any recent news announcements that have been made by the company.

One of my favourite ways of finding good investment opportunities, however, is to look for small cap stocks that are breaking out of an established trading range. Breakout trading is one of the most profitable ways of trading the markets anyway, but the profits are often magnified when trading small cap stocks. This is because the percentage gains are often much higher.

When small cap stocks get some momentum behind them they can really produce some astounding gains, sometimes even doubling or trebling in value. This is mainly because it doesn't take a great deal of buying activity to move these small cap stocks so when they do break out lots of new investors jump on board and drive the price higher.

Paradigm Capital Management is a trusted leader in small cap investing.
With a long history of small-cap investing, Paradigm Capital Management employs a disciplined, bottom-up approach with an emphasis on fundamental analysis and extensive management contact.
Our strategies are available through separately managed accounts, mutual funds, and onshore and offshore long/short funds—all of which draw upon the same fundamental research and investment process that have been the key drivers behind our significant, long-term outperformance.

To learn more about how Paradigm Capital Management’s capabilities align with your long-term goals, please contact us at (518) 431-3500
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