The Potential Risks & Rewards Of Small-Cap Stocks

Price-Earnings ratios as a predictor of twenty-year returns. From Irrational Exuberance, 2d ed. source (Photo credit: Wikipedia)

Blue chip stocks like Amazon, Apple and Google usually get the lion's share of attention from investors - after all, they have proven their worth over time and are unlikely to tank overnight. However, a lot of savvy investors choose to diversify away from those perpetual darlings of the stock market and instead invest in small-cap stocks.

Small cap stocks can be and have been subject to certain levels of risk. They can experience violent price swings and more than once they have fallen victim to fraudulent activity. However, they can also have a very attractive risk/reward ratio.

As a general rule, small-cap stocks come from companies that are relatively new to the public eye. While companies like Apple have a market cap that is quickly approaching $1 trillion, small cap stocks usually max out at now more than a few billion dollars. The Russel 2000 Index, for example, is the most commonly-used gauge for small cap stocks and it currently lists companies with market caps that range between about $144 million and $3.4 billion.

Small cap stocks are unique because they tend to rely on U.S. economic growth to be successful. They are usually more closely tied to the U.S. economy, including U.S. taxes and regulations, because they haven't yet reached the point of being internationally sought after stocks. This means they can be risky, but it also provides investors with the opportunity to see exponential gains in a short amount of time. The Russel 2000 Index, for example, rose 14% between November 2016 and January 2017 due to the political climate. For this reason a lot of investors see the value in diversifying their holdings and buying individual small cap stocks or small cap mutual funds.

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Best January In Years As Investors Eager For Stocks

This is best January in decades as investors eager for stocks. For the Dow at least, January has been the best start to the year in two decades.

The Dow Jones Industrial closed the month up by 5.8 percent, which has been its strongest close since January 1994 as per S&P Capital IQ data. The Standard & Poor’s 500, ended the month 5 percent higher, which is its best start since 1997.

The editor of the Stock Trader's Almanac, Jeff Hirsch, pointed out that the market is likely to struggle to gain further in February.

One of the major reasons why January experienced a major flow of stock funds, in close to nine years, is because majority of investors put money into equities.

Yesterday, as investors read more about earnings results and reports on the economy, the stocks drifted towards the lower side.

The Dow Jones industrial dropped to 13,860.58 about 50 points down, the S&P 5000 to 1,498.11 about 4 points down and the Nasdaq composite remained constant at 3,142.13.

The Dow is 304 points from its highest point.

Investors also received reports from the government about how the number of unemployed Americans seeking aid sharply rose within the last week. This number however, remained constant with moderate hiring.

Investors eager for stocks will also look into the strength of the job market once the non-farm payrolls report is circulated.

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Stock Carnival Ecstasy - January 31, 2012

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Welcome to the January 31, 2012 edition of Stock Carnival Ecstasy.In this issue we have Alexander Collins taking a look at Forex Trading Forecasts for 2012. Maxim Kazawy likes the Companies Raising Dividends in January 2012. In politics there are Millions In the Cayman Islands For Romney from Tommy John. And finally Tim @ Faith and Finance has a Four Factor Test for Mutual Fund investing. Hope you enjoy the articles, bookmark, share, tweet, like on Facebook and come back soon.

DeWitt Dudley presents Protecting The Owners and Stock In A Closely Held Corporation | Law Offices of Givner & Kaye posted at Law Offices of Givner & Kaye, saying, "Operating a business in a closely held corporation can be an excellent way to protect the owner from problems with the business. If the business is adequately capitalized, then someone suing the business may not be able to “pierce the corporate veil” and get to the personal assets of the owner."

Juliet Jones presents 10 Ways to Stay Safe When Shopping Online posted at Business Insurance.

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Alexander Collins presents Forex Trading Forecast for 2012. Is EURO doomed to collapse? posted at PipBurner Forex blog, saying, "Is it worth to invest in Forex trading in 2012?"

Dr. Dean presents A Million Bucks? In My 401K? Ya Gotta Be Kiddin’! posted at Dr. Dean's TheMillionaireNurse.com Blog, saying, "How do you end up with a million bucks in your retirement account when you're ready to retire? It's simple, stupid!"

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Maxim Kazawy presents Companies Raising Dividends in January 2012 posted at Best Dividend Stocks, saying, "It has been a great start to the year 2012 with the S&P 500 up 4.6% year to date while the Dow Jones Industrial Average has racked up 4.12% in gains. The corporate business climate in America is improving with unemployment claims falling below 350,000 which is the lowest it has been since April 2008. In this bull market, I am searching for the best dividend paying stocks that are raising distributions. Let's start off with companies operating in the energy distribution and storage businesses."

Maxim Kazawy presents Dividend Stocks I want to Purchase on a Post Earnings Selloff - January 2012 posted at Best Dividend Stocks, saying, "McDonalds is a great American franchise that has returned a total annualized return of 29% over the last decade; look at the chart below, it is the nicest chart I have ever seen. McDonalds operates over 30,000 franchised and non-franchised restaurants in over 100 countries around the world. The company generates same-store sales growth of over 7.4% monthly in November 2011 and cash from operating activities of $5.365 billion in the 3rd quarter 2011."

Tommy John presents Millions In Cayman Islands Investment Funds For Romney | 2010 Taxes - Free Tax Filing Options posted at 2010Taxes, saying, "Republican presidential candidate Mitt Romney has disclosed that he has millions of dollars worth of investment funds set up in the Caribbean tax haven of the Cayman Islands."

Tim @ Faith and Finance presents The Four Factor Test for Mutual Funds posted at Faith and Finance, saying, "Your mutual fund pick should be based on at least four factors: fees, fund management philosophy, experience, and performance."

Dividend Growth Investor presents Eleven Dividend Kings, Raising dividends for 50+ years posted at Dividend Growth Investor, saying, "There are eleven companies however, which have each managed to increase distributions for over half a century. This is no small accomplishment, given the fact that the past half a century included several recessions, oil price shocks, high inflation and interest rates and several wars."

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Rachel C. presents Insuring a Teenage Driver: Mitigating the Cost posted at Auto Insurance Quotes, saying, "Insuring a teen driver is extremely expensive. Depending on the age of the driver, the type of vehicle driven and applicable state restrictions, adding a teen driver can increase insurance rates as much as 100 percent or more. With the cost of insuring young drivers so high, it’s surprising that parents are even willing to license their teens."

Jackson presents Chris Christie And 2012 Taxes Panacea Or A Pandora?s Box posted at 2009 Tax, saying, "The Governor of New Jersey, Chris Christie has 2012 Taxes in mind with his ten percent income tax for the people of his state."

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Robert Moore presents The Recent Tax Scandals Of Hollywood Stars – 2011 Taxes - Free Tax Filing Options posted at 2011 Taxes, saying, "Hollywood stars such as Sinbad, Pam Anderson, Nicolas Cage, Marc Anthony, Martha Stewart and others have had to learn this lesson in a very difficult fashion."

That concludes this edition. Submit your blog article to the next edition of stock carnival ecstasy using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

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