Before diving into small-cap stocks in 2022, it’s important to know key info about the small-cap market.
From 1979-2015, small-cap stocks outperformed large-cap stocks 20 times.
Due to their size relative to their large-cap counterparts, small-cap stocks are more likely to yield you a greater return.
It’s easier to grow when you’re small versus trying to grow when you’re already so large.
But being so small is a double-edged sword.
When you lack capital, you lack the resources to sustain yourself during unfavorable times.
It’s why so many start-ups fail, but also the reason so many start-ups grow exponentially.
In 2021, 85% of actively managed small-cap funds beat their benchmarks, which would be the Russell 2000.
For perspective, the same report shows only 40% of actively managed large-cap funds outperformed their benchmarks.
It’s clear to see that small-caps can get you a significant return, but are they worth investing in 2022?
First, let’s go over what you need to know before and after investing.
Things to Know Before and After an Investment
Investing is more than throwing money at stock and hoping it’ll grow.
Successful investors do their research to identify potential stocks, know what kind of investors they are and what their level of risk is.
Research
Within the small-cap market are plenty of companies with the potential to grow exponentially.
But their potential to grow cannot overshadow their potential to fail.
When evaluating your options, you want to thoroughly research small- caps.
One big indicator of imminent failure is high levels of debt.
A company’s balance sheet will tell you a lot about the management and overall health of the company.
You’ll also want to research the sector the small-cap is in.
Some industries, such as copper mining, have seen a major upswing in 2021.
But not all industries favored small-cap companies, so you’ll want to pick the most favorable situation.
This is where staying up to date on overall market trends can benefit you the most.
What Kind of Investor Are You?
Do you prefer to look for stock yourself, or are you more likely to hand the reins over to a portfolio manager?
If the former is your choice, you’re an active investor.
Some active investors perform the duties of a portfolio manager, however, they don’t usually take that job title.
Active investing is a hands-on approach that anyone could do, but a certain level of expertise is needed to be successful at it.
On the other hand, passive investors typically use a buy-and-hold strategy.
This means they limit the amount they buy or sell within their portfolios.
Passive investing is a long-term strategy.
An example of passive investing is buying an index fund.
Most passive investors choose index funds to diversify their portfolios.
Your Risk Tolerance
Small-cap stocks are known as being risky ventures because small companies lack the resources to combat rough economic conditions.
It’s the reason most analysts ignore this part of the stock market.
In periods of recession, small-cap stocks have a difficult time staying operational.
Before investing in small-cap stocks, be sure that you can handle a bad investment.
Asymmetric Risk and Small-cap investment
Small-cap investing is considered an asymmetric risk, which means that the potential risk does not equal the potential reward.
In a positive asymmetric risk-reward, you could only lose an amount smaller than your investment.
A negative asymmetric risk-reward would be an investment that could lose you more money than you could gain.
An easier way of saying this is a $5 investment that has the potential to earn you $30 is a positive asymmetric risk.
The same logic applies to small-cap investing.
You can take $1000 and pour it into some big company for a fraction of a share.
Or you can maximize that $1000 and by multiple shares of a solid small-cap company for a fraction of the price.
It’s one of the pros of investing in small caps.
Small-Cap Stocks Are in Line to Be Big Winners in 2022
Due to rising inflation, 2022 looks uncertain for most investors.
But some believe that the best place to weather the storm is in the small-cap market.
There are several undervalued stock choices in the small-cap market that investors can pick up before they get big.
Although experts are beginning to believe that the economy will continue to grow in 2022, they expect it to slow.
Still, small-cap companies within indices have shown more growth over 2021 than their large-cap counterparts.
So long as the omicron variant does not cause a new wave of shutdowns, small-cap stocks may be your best bet.
How to Find Small-Cap Stocks
The perfect stock doesn’t exist, but with the right research, you can find nearly perfect opportunities in the small-cap market. Here are some things you should look out for when finding small-cap stocks.
What Kind of Market Is Your Small-cap In?
Small-caps are vulnerable to market cycles and economic conditions.
If the economy hits a rough patch, investing in small-caps is probably not a good idea.
But in recovery periods, small-caps benefit the most, making it an ideal time to invest.
Small-caps are also affected by the local conditions, unlike their large-cap counterparts.
Specializing in a Service or Flied
When trends rise, small-cap companies can take advantage by specializing in a specific field or service.
An easy example of this is looking at the global push for green technology.
Nations, including China, the US, and the EU, make efforts to replace gas-powered vehicles with electric vehicles (EVs).
Producing enough batteries for the increasing demand for EVs requires a significant amount of copper.
So companies that mine for copper and other metals can be a great small-cap investment opportunity.
Check the Balance Sheet
Small-cap stocks typically don’t have a long company history but you can tell a lot about a company through its balance sheet.
If the company you want to invest in takes on too much debt, you should pass.
Debt is the killer of growth and can be especially fatal when economic conditions turn south.
Click here to know more about how to find small cap stocks.
Learn Smart Ways to Play The Small-cap Market
Anyone can play the stock market, but only smart investors will take advantage of the resources available to help them make a greater profit. If you want to be a smarter investor then you need to join our community of like-minded investors. Dear Retail investors regularly get the latest stock market information, exclusive investment opportunities, and more. Think it sounds too good to be true? Join today and find out!
