Ready to jump on the small-cap bandwagon? This post is dedicated to teaching you how to pick small-cap stocks. I personally focus on penny stocks when I trade, but it’s good to know how to trade a variety of different size stocks especially when you are just getting started.

If you want to seek out the top small-cap stocks, you’ll need to sift through the many options that are available. To do that you’ll need to use a…

Small-Cap Stock Screener

A stock screener can be immensely helpful in this regard. Stock screeners can be used to filter by market cap to narrow down the choices. By cross-referencing the shortlist with other fundamental and technical indicators, (like we discussed yesterday) you can begin to narrow down a list of the top dividend stocks to consider.

Follow Stock Indicators

When you’ve determined a few small-cap stocks that you’re considering, let stock indicators be part of your continuing research. These are the things that can be the tie breakers that help you choose one stock versus another.

High Volume and News Catalysts

Look for high volume and news catalysts when seeking out opportunities with small-cap stocks.

Volume is super important. You want enough shares being traded on a daily basis so that you’ll find it easy to get in and out of a position. You don’t want to be stuck with shares that don’t move!

High volume plus a great news catalyst is a winning combo. If there is an event such as an earnings report, an exciting new hire, or something else that could affect the stock, and it has good volume, it may be a good time to consider making a trade.

Look for Clear and Easy Patterns

Why make things hard on yourself? Don’t make monitoring stock charts more complicated than it needs to be! Focus on the clean, easily identifiable patterns.

If you’re reviewing charts for low-cap stocks and can see no discernible pattern…

Move.On.

Don’t try to see things that aren’t there. That’s magical thinking and most likely it will cause you to lose money.

By trying to make a trade happen by force of sheer will, you could be missing out on actually viable and good trades ideas.

Patterns are just that: reliable and repeating. By finding good, clean patterns, you’ll be revealing the best possibilities for stocks to trade.

Key Tips on How to Invest in Small-Cap Stocks

Ready to be a big fish in a small (cap) pond? Here are some of my key tips for how to invest in small-cap stocks:

Create Your Own Small-Cap Stock Watchlist

I’m a huge fan of watchlists.

A watchlist is a trader’s secret weapon and a way to find your edge.

Your watchlist is a small, manageable list of stocks that you’re considering.

You want to keep it fairly small — after all, it’s easier to monitor five stocks than 20 or 100, for instance, especially if you’re a new trader and still learning how things work.

You will keep an eye on the stocks on this list to see if they meet your criteria. If and when they do, you can move forward with the trade

To keep track of the stocks on your watchlist, you’ll be looking at indicators and looking for chart patterns volume, breakouts or breakdowns, or any change in the moving average.

Keep a spreadsheet for your watchlist so that you can track the stocks in question. Review them frequently so that you don’t miss any important moves. This way, when an opportunity presents itself, you’ll be ready.

Invest in Small-Caps That Offer Growth and Value

The reason why you’re seeking out small-cap stocks is that they can grow your account faster than large-cap stocks, which are steady but tend to be slower moving.

Small-cap stocks are more volatile, and therefore provide a greater potential for profits. However, you’re not seeking them out because you crave volatility. You want to embrace their volatility now because of the potential for what they can offer later.

Be sure to opt for small-caps that offer both growth and value, because it’s the companies that are poised to grow will offer the most opportunities over time.

Never Chase Your Losses

There’s a strange thing that happens to traders who are in losing trades. Often, instead of recognizing that they’re in a losing trade and doing the right thing and cutting their losses, they start chasing.

They start telling themselves that things will turn around. This self-delusion causes them to stay in trades way too long, and they might even pour more money into a loser!

This is such a mistake! Sometimes, the hard thing is also the right thing, so it’s important to be quick in cutting your losses.

Cutting losses without emotion and quickly is vital if you want to be a trader long term. If you can’t do this, your losses will quickly mount and you’ll blow up your account.

Do not chase losses. Before you even get into the trade, make it part of your plan to determine at what point you will cut losses if things start going not your way.

And then — actually stick to the plan. Don’t get greedy, and don’t hope that things will turn around.

Don’t Trust Promoters

Marketing can convince you that you need something that you don’t.

Stock promoters are straight-up marketers, period. They aren’t trying to help you with the stocks they are promoting — they are trying to help themselves. Do NOT take them at their word.

I’m not saying that stock promoters are evil people… But they’re self-serving. That makes them biased. So while you can listen to their tips, do your own research to make sure that what they say is based on fact and not just spun fiction.

While I’m at it, it’s fine to listen to any and all advice, but don’t execute based on what stock marketers say. Do your own research. It’s worth the time and effort.

The Bottom Line

Perhaps the biggest tip I can offer for success in the stock market, whether you’re investing in small-cap stocks or taking a totally different approach, is that you should never stop learning.

Small-cap stocks can be risky, but they can also offer great potential rewards.

Less analyst coverage, less historical data, and a smaller scale makes these stocks more volatile, and therefore less appetizing to large institutional investors.

However, if you’re willing to put in the proactive research necessary to separate the up-and-comers from the underperformers, you can create opportunities for potential returns that you simply couldn’t find with large-cap stocks.