Once you have done your due diligence and found potential small-cap stocks, the next step is to actually invest in them. Even though they might sound the same, “picking small-cap stocks” and “investing in small-cap stocks” are actually slightly different things. Picking small-cap stocks is the process of researching and vetting potential stocks. Investing in small-cap stocks is the process of actually making an investment plan and purchasing shares.
With that said, let’s examine how you can invest in small-cap stocks.
Step 1: Open a Brokerage Account
Before you can start working out, you’ll need to sign up for a gym membership. Similarly, before you can invest in small-cap stocks, you will need to open a brokerage account. A brokerage account is just the account where you will be able to buy, hold, and sell your securities.
Brokerage accounts are a little bit like savings accounts in the sense that they are all fairly similar, except for a few slight differences. Here are a few things to look for when selecting your brokerage:
- What assets do they allow you to purchase?
- Do you like the user interface of their platform?
- Do they charge commissions or fees?
- Do they have educational materials?
- Do they have an account minimum?
- Do they have a mobile platform as well as online?
The answers to these questions will give you a good idea of which brokerage is best for you. Here are a few of the most popular brokerage platforms to consider taking a look at (in no order):
- Charles Schwab
- TD Ameritrade
Once you have selected your brokerage, it’s time to assess your risk tolerance.
Step 2: Balance Risk/Reward
Investing in a constant tug of war between risk and reward. In general, the riskier investment that you buy, the higher your potential risk will be. Nobody would put their money at risk if they didn’t expect to earn a high return. On the other hand, if there was an investment that generated a 100% return with 0 risk then everybody would be rich. The process of determining how much risk you want to take is called determining your risk tolerance.
If you’ve read our article on “Small Cap vs Large Cap Stocks” then you know that small-cap stocks are inherently riskier than large-cap stocks. Due to this, you should expect to earn a higher return on the small-cap stocks that you buy.
Usually, almost all investors will “balance” their portfolio by choosing a combination of risky and safe assets. This way they still have the opportunity to earn a high return while potentially lowering their risk.
Knowing what your time horizon is will also give you a good idea of how much risk you want to take.
Step 3: Determine Time Horizon
Your time horizon is the length of time that you expect to keep your money invested for. In general, no asset is going to print money for you overnight. Most assets need time to appreciate in value.
For example, at the beginning of 2021 shares of Microsoft stock cost about $217/share. By mid-January, they had actually decreased in value to about $212/share. However, by mid-January they had grown in value to $250/share. And, by November 2021 they were up to about $330/share. In most cases, the key is to hold onto an asset long enough that it has time to increase in value. For great companies like Microsoft, this might mean that you hold onto it for years.
To get a good idea of what your time horizon is, just ask yourself how long you’ll be able to keep your money invested before you’ll need your money. A few reasons that you might need your investment back are to buy a home, pay for your children’s college tuition, or fund your retirement.
Step 4: Select Stocks
We would recommend writing out an investment plan before buying your stocks so that you know how long you plan to hold the shares. For example, if you’re incredibly confident in a stock then you will probably plan to hold it for at least a year. Additionally, keep in mind that it’s never certain how long it will take a stock’s price to appreciate in value. Even fantastic companies like Amazon can have a year of stagnant stock growth. This mainly relies on how investors are valuing a company. Making a solid plan beforehand will help prevent you from panic-selling if the stock drops in value in the short term.
We hope that you’ve found this article valuable when it comes to learning how you can invest in small-cap stocks. If you need a little inspiration on what good a small-cap stock might look like, click here.