Let’s face it, there are way too many stocks to filter through to consider a trade or investment. Even if you narrow down the total market to just small cap stocks, or those that have a market capitalization between $300M and $2B, and micro-cap stocks, those with a market cap between $50M and $300M, there are still thousands of stocks to look through. Small-cap, micro-cap and penny stocks (those trading below $5 per share) provide immense upside potential, as they have room to grow, unlike mid- or large-cap stocks. That in mind, there are some tips and tricks to look for small-cap, micro-cap and penny stocks to trade.
Why You Should Consider Stocks with Low Market Capitalizations
Historically, small-cap and micro-cap stocks have outperformed mid- and large-cap stocks. Whether market participants like it or not, small-cap, micro-cap and penny stocks could provide huge growth potential. Despite what you might have heard about penny stocks, there are actually legit companies out there that would be considered a penny stock, Sirius XM Holdings Inc. (NASDAQ: SIRI) recently. There have also been some companies that have grown from penny stocks to large multi-billion dollar corporations, such as Monster Beverage Corporation (NASDAQ: MNST). That said, you might want to consider how you could filter through small cap and penny stocks to trade.
Finding Small Cap and Penny Stocks to Trade
Now that we’ve gone over some reasons why you want to look for small caps and penny stocks to trade, let’s take a look at how you could narrow your list of potential stocks to trade. First thing’s first, you want to look for stocks in companies that have an innovative idea and could potentially launch them to the forefront of the industry. In general, these companies might be technology, energy, biotechnology and pharmaceuticals.
Moving on, www.finviz.com will be your friend when filtering for small cap and penny stocks. Let’s take a look at their screener.
If you look at the snippet of the screener, all you have to do is go under the descriptive tab on their screener page, and select how you want to figure out stocks. In the figure above, we’ve just filtered for small-cap stocks. This list includes over 1,000 stocks. Now, if you want to look at penny stocks that are small cap stocks, that is, those trading below $5 with a market capitalization between $300M and $2B, all you have to do is change the price.
Notice how much shorter this list of stocks has gotten. Only around 120 stocks now. Next, you might want to filter for small-cap penny stocks in a specified industry or sector. Let’s assume we want to look at small-cap penny stocks in the technology sector.
We’ve got that list down to only 15 stocks. Now, it’s pretty easy to research these stocks to find the “best” trading opportunity.
Let’s take a look at how to research these stocks now.
Example of How to Research Small-Cap Stocks
Generally, you want to look for small-cap penny stocks to trade that are listed on NASDAQ or NYSE. When stocks trade on NASDAQ or NYSE, they’re required to report everything to the U.S. Securities and Exchange Commission (SEC). That said, you might want to start with these. However, if you can’t find any stocks traded on national exchanges, you just need to do your proper due diligence and look through any SEC filings and www.OTCMarkets.com.
That in mind, let’s take a look at one of the stocks included on our list from Finviz.
Plug Power Inc (NASDAQ: PLUG) is one small-cap penny stock that could potentially innovate its industry. The stock currently has a market capitalization of over $450M and trades under $5. Let’s take a look at the company now. These best place to start with your due diligence is the company’s website. Take a look at Plug Power’s “About Us” page.
Source: Plug Power
When you look at the company’s “About Us” page, you get an overall idea of the company. With Plug Power, it’s clearly in the hydrogen and fuel cell technology, in other words, it’s looking to innovate the energy industry, and it’s idea is scalable. The company currently offers hydrogen and fuel cell products to various industries, such as the electric vehicle industry. This would help to increase productivity, efficiency and could potentially carbon footprints in a cost-effective manner.
Next, you would want to head over to the SEC’s website. Here, you would be able to look at any important filings and press releases. Here’s a look at an excerpt from an SEC Form 8-K filing, which indicated that Plug Power’s products could potentially be in high demand.
Now, you would still need to do further due diligence, but you should get the overall idea.
The Bottom Line
When you’re first starting out and looking for stocks to potentially trade, it’s pretty hard to find those that could have immense upside potential. Now, you could look to small-cap and micro-cap penny stocks with an innovative product or idea that is scalable, which could potentially indicate it might rise, if they properly execute.