How Much Should One Pay For Small Cap Stocks?
Small Cap Stocks – Market Value Not Equal to Actual Value
A small loan can help you if you are short of cash until your next payday, but if you invest in the stock market and follow the crowd in their buying and selling habits, you may end up with many more liabilities than assets. Why is that? Have you noticed how much the stock market fluctuates in a day, and also the ups and downs of prices? Does that mean that the companies’ values goes up and down as much as the share price, or does that mean that there may be some other force at work here? As you will see, the market value of the share does not equal actual value of the same share in terms of a company’s value.
Small Cap Stocks – Market Price Based on Emotions, Not Logic
One of the pioneers in value investing, Benjamin Graham, believed that many people rely too much on their emotions when investing rather than their logic. This explains why the market fluctuates so much, and why so many people claim that the stock market is risky. The risk is constant buying and selling that is always going on in the market. This constant buying and selling is what either drives the share price up or down, and it’s what creates the risk. Ben Graham, in his book “The Intelligent Investor” suggests that building wealth from the stock market necessitates using a “dollar cost averaging” technique, to always buy more shares at lower prices over time. As inflation and company values grow over time, your investments will be worth more in the long run. It’s also known as the “buy low and sell high” technique. Unfortunately, most people tend to bring their emotions into their investing, and will panic and sell when the price is going down, because they are afraid to lose any more money on their investments, leaving them open to take out a small loan to survive.
Small Cap Stocks – Beyond the Smoke and Mirrors
The stock market is riddled with confusing terms, acronyms and policies, making it very difficult for the average investor to understand. All this is just smoke and mirrors designed to keep most people in the dark and dependent on high-priced brokers to navigate the investing maze for them. However, if you were to peek behind the curtain, you would see that all the confusion is just smoke and mirrors.
Small Cap Stocks – Inflated Price? Inflated Value!
Brokers and fund managers will buy or sell enough shares to drive price up or down, depending on where the price is trending, to control the market. Perhaps it’s due to a company that got good news or bad, and investors are trying to position themselves to not lose a lot of money, or make some. This tends to skew the value of a share price, and unbalances the market. Therefore, if a share price is going up too high, brokers or fund managers will sell several million shares to drive the price back down. Likewise, if a share price is going down too fast, they will buy as many shares to make it even. So, if you see share prices inflated, don’t make the mistake of thinking it is worth that much. In fact, they may not be worth much at all!
Small Cap Stocks – P/E Ratio Tells it All
There is a very simple way to determine if a certain share price is on target or not—look at the Price per Earnings ratio. This is a method of valuation that takes the current share price on the market, divided by per-share earnings over a period of time, for arguments’ sake, a year. So, if a company’s share price is $ 24 and the earnings per share over the past 12 months have been $ 2, the P/E ratio is 12. Typically, the higher the P/E ratio is, the higher the expectations investors will have for company growth. This means that you will be able to see higher earnings within the next year with this company. However, the lower the ratio, the slower the growth regardless of what the market is doing.
Small Cap Stocks – Buy Low, Sell High
When you can learn how to find the correct value of a company or share, you will know when the share price is at its lowest, and when you can buy. After share prices crest, you can sell your shares and pocket the rest without needing a small loan. If you do this, you will be able to make money on the stock market when everyone else is losing money.