If you’re looking for small investments, you are probably looking at penny stocks and small cap stocks.  Penny stocks are officially defined as stocks selling for less than $5 per share.  Small caps are stocks that are under $2 billion in market capitalization.

Market cap is measured by multiplying the number of outstanding shares by the share price.  It tells you how much the market considers the value of the company to be.  Even those who have a lot of capital to work with use small stocks in their investment strategy.

Small Cap Stocks

Small cap stocks can be a good potential small investment if you are looking for growth.  The idea is that you get in on a company whiles it’s still small, then your money can grow with the company.  Most people investing in small caps want to invest in the next Google or Microsoft while on the ground floor before it gets big.

One of the advantages to small caps is that they tend to be cheap.  That means you don’t need tons of money to invest in it.  It also means you can diversify your risk.

These stocks tend to be more risky than large caps.  That means you want to invest in several small caps to diversify across multiple companies.  If 5 fail and only 1 becomes the next Google, it will probably make up for the losses.

If you aren’t interested in finding your own stocks, you can invest in small cap funds where a professional money manager picks them for you.  You may have to pay a management fee so it’ll cost you.  But you can also buy ETFs.  Most funds have corresponding ETFs that mirror exactly the mutual fund.

Penny Stocks

All I can say about penny stocks is that you should be very careful.  Unless you personally know the company, it might not be worth the risk.  Many frauds are created around penny stocks.  In addition, it’s hard to find information on these stocks as well.

If you think about it realistically, many good companies that turn out to be a Microsoft or Google have significant market cap before they go public.  They usually have private investors beforehand.  They also have proof of concept where they are making significant earnings before they go IPO.

The other major disadvantage with a penny stock is that it is highly illiquid.  Liquidity is a huge issue for penny stocks.  There is usually very little trading volume, so it may be very difficult to sell if you need to get out of it quickly.

When most people look at small investments in the stock market, they primarily look at these two types of stocks.  One is not a bad idea, the other may be dangerous.