Diamonds in rough processing

Often small market capitalization is ignored by the market. This means that there are significant opportunities for investors and traders, but also significant risks. Here I will tell you some tips on investing in stocks with small capitalizations. Diamond Search So you want to find the next Microsoft or the next Cochlear. Sounds great, but it’s not as easy as it seems. There are over 1,000 small companies listed on the ASX.

How do you find potential diamonds in the mud when there isn’t always a lot of information about these companies and certainly not a lot of research available? Research brokerage houses and analysts typically report the top 200 stocks in the Australian market. Also, it’s a case of finding a research team that specializes in small limits, or do it yourself. ASX Small Capitalization Index If you want to invest in a small capitalization basket, there is the ASX Small Capitalization Index. It invests in the top 300 companies, which are also not included in the top 100 index. What is a little hat? Low-cap companies are companies with a market capitalization of less than $ 300 million in the Australian stock market. Companies tend to have their own life cycle. With a small capitalization you usually look at businesses that are focused on growth. This focus on growth obviously brings additional risk, but also the potential for greater returns.

Growth is usually popular when the market is growing, but very unpopular when the market is falling.

Bear markets

If there is a bear market (fall), chances are that any small stocks you have will be killed. This is because risk is the first thing one seeks to exclude from portfolios when the market falls. Investors and traders tend to rush back to safe havens such as cash, or relatively safe havens such as defense campaigns with blue chips.

Bull markets

On the other hand, in a bullish (growing) market, small capitalizations usually work relatively well, as investors return risk to their portfolios. Profit The problem with small constraints is that many of them are not yet making a profit, so they are quite difficult to assess from a profit perspective. Traditional ratios such as P / E and return on equity (ROE) are not relevant if there is no historical revenue. If a company has sales, you can look at sales growth and price-to-sales ratio. At some point, sales will have to turn into profits to make the business model viable.

Stock Search Here are some tips to help you find these rough diamonds yourself:

o Look at the company’s shareholders. Does the company have the support of a large organization? Or maybe even the venture capital firm that won the majority of the shares? While this is unacceptable, it may be a sign that these shareholders have made difficult opportunities and looked deeply into the business potential of the core business.

o How many years before commercialization and what is the probability of commercialization? Read the annual report to work out the timing and business plan of the organization. What is the potential market after commercialization is achieved? What P / E ratios are traded by potential competitors or similar companies? What type of income can you expect based on these estimates?

o Who manages? Do they have experience doing the same before? Is there visibility of what is happening in the business or as a shareholder? Will it be a guessing game? It requires faith. Investing in small capital usually takes time. And it usually takes a lot of faith to determine if the ups and downs of a smaller growing company are worth your investment.

This is very risky. But on the other hand, there are potentially many companies that will follow Cochlear, Resmed or Fortescue. Why not dig in and get your hands dirty? You can just find this diamond in rough treatment.