Microcap Stocks: Buying David Over Goliath

If I asked you to think of some great companies, which ones would come to mind?

Apple Inc. [NASDAQ:APPL]? Berkshire Hathaway Inc. [NYSE:BRK]? Maybe even Alphabet Inc. [NASDAQ:GOOGL]?

There’s a common thread between all these companies: They’re all huge. Each has a market capitalisation in the hundreds of billions. And there is a reason they’re so highly valued.

But when you think of great companies, why don’t any on the smaller end come to mind?

Is it because they’re not as established? Or maybe it’s because they don’t have extremely large sources of capital?

The biblical story of David and Goliath has been used throughout history to illustrate how the small and nimble can overcome the big and powerful. Size is not everything, especially when it comes to stocks.

The business landscape has changed tremendously over the past 20 years. Long gone are the days of placing advertisements in newspapers. Venture capital has even made sources of funding more available to smaller start-ups. Even geography isn’t a problem anymore.

If your market is in the US or China, you can sell to your consumers from the comfort of your own home. No one sees small as a disadvantage anymore. In fact, sometimes smaller companies can be more of a threat than larger ones.

The reason for this is their ability to be flexible, nimble and swift.

Microcaps are Agile

Small businesses also have the ability to quickly try new things. This allows them to be more innovative, adapting to market conditions on the fly.

Tiny companies are able to respond to market demands quicker than their larger competitors. They have lean business structures. They can make consumers feel valued. And they’ve got the potential to generate explosive growth.

In contrast, big businesses seem like lumbering buffoons who simply cut costs and capture additional tiny slices of market share.

An example could be a small miner thinking about getting into rare earths. Rare earths are used in various electronics, among other technologies. They are the magical rocks that power our modern technical world.

The point I’m getting at is that you probably would not see BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] doing the same thing. These big miners are in the business of iron ore, coal and copper. And it likely won’t change.

BHP is expecting to produce more copper in the future. Even this minor shift will take some time for the big miner.

This is exactly why investing in microcap stocks can be so attractive. Not to mention the potentially explosive returns they offer. And as technology advances, I believe the environment for microcaps will only get better.

If you want to inject serious growth into your portfolio, don’t dismiss the smaller stocks in the market.

Härje Ronngard,

Junior Analyst, Money Morning

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