One of the biggest issues when it comes to investing in small-cap stocks, or any stock really, is picking the right company, at the right time.
Less than five years ago, language service solution company Appen Ltd [ASX:APX] was trading near $1.00 a share.
Now? Well its share price is soaring around $30.32 apiece. That’s an increase of about 2,932% since 18 September 2015. And any investor lucky enough to get in early enough, would be sitting back right now and enjoying its run.
Appen’s share price is trading at $30.45.
Know your appetite for risk
When it comes to picking a company like Appen before the mainstream buyers start to get wind of it, there’s key factors that every investor should look for.
While small-cap stocks are arguably the most exciting part of the market, and are often packed with the most potential, it does carry more risk. They have bigger price swings and these price swings can happen more often, with little warning to shareholders.
Then again, they also carry a lot of potential to pay off massively. That’s the risk/reward payoff that you have to consider for yourself. Here at Money Morning, we never suggest investing all your money in such a risky part of the stock market.
However, a good small-cap stock can do wonders for your portfolio. For instance, placing a small stake in a small-cap company could still return more than a large sum invested in a large cap company, over time.
Of course, you should continue to carry out your own research. A good way to get started could be to follow a well-rounded newsletter service. It can introduce you to a whole range of companies and markets ready to make a breakout.
And at the very least, generate ideas.
Money Morning editor, Sam Volkering, has put together a brand-new report called: ‘The Best Small-Cap Stocks to Own Today’ that aims to help you get the ball rolling on your small-cap research. Download now and read them for free.
What Appen has that you should look for in other small-caps
When looking for a company like Appen, while it was trading near $1.00 in 2015, realistically you’re looking to the smaller end of a $100 million market cap company. Only a small number of investors will pour money into a company with such a small market cap.
That’s treading water for investors and heading further into high risk territory. More often than not, most investors will err on the side of caution before even deciding to invest. It’s all about gauging your risk appetite.
Even if you’ve decided on a company and invested, you’ve got to ride out the tough stages of their life as a company. Some won’t make it past the first hurdle at all, so it’s important that you know what to look for.
While no two companies are ever the same, there are some common factors which often make them a more appealing investment.
In the small-cap market a company’s market position and management is vital. As is common knowledge, tech companies are doing pretty well at the moment, so Appen has already checked off its market position.
The next thing to look at is whether the company has an industry-experienced management team. With more than 20 years of experience and operating in over 130 countries, Appen has established itself as a strong contender in the tech market.
It also has a business that knows its customers, providing and improving data for the development of AI and machine learning applications, that are then sold to companies like Facebook, Microsoft and Google.
Over time the company became more valued to its clients, which has allowed it to ramp up prices.
Obviously not every tech or small-cap company can mimic Appen’s journey, but if you do your research right you might just find a company that will pave its own way.
For Money Morning
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