Today, we’re going to look at something a little different. We’re going to look at when you should sell your small-caps stocks. It’s not always an easy decision to make. But it’s an important part of investing. If done wrong, it could significantly reduce your returns. But if done right, you could lock in profits and minimise your risk at the same time.
For small-cap stocks, cash flow is extremely important. I would argue it’s even more important for small-cap than it is for Blue Chips like IBM. And that’s because they have far fewer options. Unlike IBM, small-caps don’t have as much power to renegotiate lending terms.
You’re looking for small-caps with the potential to grow earnings. How do you know earnings will grow? Well, maybe it’s as simple as looking at the industry. Small-caps ready to double, triple and quadruple can be found in the resource, tech, finance and a whole bunch of other sectors. But when trying to grab a 10-bagger, it helps to look in growing markets.
Small-caps are an amazing opportunity. They have far more volatility, but that’s the point. Not all small-caps are worthy investments. Some could be amazing. Others you’d be completely crazy to buy. Today we’re going to look at how to approach small-cap investing. Specifically, we’re going to look at how to limit our losses.
Blue Sky Limited shares are currently trading at $4.08, the lowest price for the company in almost three years. Blue Sky’s share price has dropped a total of over 64% in the past month alone, from $11.43 on 27 March.
Let’s look at the large blue chips. These are usually companies with a market cap of $10 billion and over. Some typical blue chips are BHP Billiton Limited [ASX:BHP] and Commonwealth Bank of Australia [ASX:CBA]. BHP has a market cap of $156 billion and CBA has a market cap of $139 billion.
Big institutional investors, for example, usually don’t venture into the small end of town mainly because of their size. Many of these money managers have hundreds of millions to put to work — they simply can’t invest in smaller stocks. That’s why I’d argue small-cap investing is perfect for individual investors, like you.
Before you can start to find small-cap gems hidden on the ASX, you first need to find gems in the market, and we need to know what small-caps are. So let’s cover some basics. Like the name suggests, small-cap stocks are small stocks.
Founded in 2006 as a free-to-use service funded by advertising, Spotify is now the leading music streaming service. The company made its debut on the New York Stock Exchange overnight. After reaching a high of $169, shares closed at $149.01 — 13% higher than its reference price on its first day of trading.
If the market does scream lower, there’s a chance for you to pick up multiple ‘castle’ stocks protected by deep wide moats at bargain prices. These are the kinds of companies (businesses with moats) that you should be looking to buy if our market drops lower this year.