subject: Finding The Top Ten Small Cap Stocks [print this page] Finding The Top Ten Small Cap Stocks Finding The Top Ten Small Cap Stocks
One way to separate the top 10 micro cap shares from the rest can be to utilize a style of investing known as value investing.
Value investing follows the kind of approach that will help you identify which stocks are fundamentally sound but are such that their share price is trading below what is considered a reasonable price. Instead of concerning themselves with the external influences that can affect the price of the company, value investors tend to focus on the actual company and the fundamentals that make up that business such as dividends (if any), earnings growth and book value.
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Once a company has been isolated and you have put it into your top 10 then, as a value investor, you have made an assumption that the market has incorrectly valued the company and it is under priced. You can then take up a position in these shares and wait for the market to realize their mistake and buy, pushing the price of the company upwards.
Value investing is a more long term approach therefore they tend not to concentrate on short term price fluctuations. Although if you are looking to work in a shorter time frame then it will never harm to hone in on your skills to picking shares that are undervalued because you would expect that other investors will also note the same thing as you and you can make a return!
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The subsequent check list should help you get started: you want to discover shares with a price to book ratio, PEG, debt to equity ratio of all less than 1, a P/E ratio in the bottom ten% for its sector.. Then you want to check the current price that the stock is trading at and make sure that you buy it when the price of the stock is such that it represents 60-70% of its intrinsic value.
If you are unsure how to calculate the above I have included a brief over view for you. You must take the present share price and divide it by the total book value per share in order to work out the book value. The debt to equity ratio is calculated by taking the total liabilities and dividing by the total shareholder equity.
You can calculate the price - earnings ratio by dividing the current price of the company by the annual earnings per stock and lastly the PEG is calculated by dividing the P/E by the projected growth in earnings.
Micro cap stocks will often trade infrequently therefore the appeal of micro cap shares to the value investor is very high as well as the opportunity over time to convert a small investment into a significant return.
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