The little guys win

It’s easy to see why people don’t like small capitalization stocks these days. Small cap stocks by which I mean companies with stock market values of less than $1 billion plunged more than 20% in a span of only six weeks this summer. The hammering was a painful reminder of the risks that go along with small caps. When liquidity dries up as it did this summer smaller stocks wither, no matter what their prospects. Small caps suffer because they tend to be in early stages of development and thus are more vulnerable than larger firms. Many small caps have only one product. Many need to raise money to fund their expansion. Many also lack management depth and depend on the skills of one or two top executives. So why would anyone invest in small caps? Because these firms offer opportunities that help offset their risks. Small cap stocks have historically outperformed their larger brethren by about two percentage points a year. While it’s unlikely that your favorite small cap firm will turn into the next Research In Motion, you can make good money in small caps by diversifying, focusing on firms with tangible assets or services, and avoiding glamorous concept stocks. Any small cap investor should hold a minimum of 10 stocks in three or four different industries. Even with this level of diversification, it’s not unusual for your portfolio to move up or down each day by 3%. If that level of volatility is likely to cut into your sleep time, delegate your small cap investing to a small cap mutual fund or buy exchange-traded funds (ETFs) that follow small cap indexes in the U.S. and Canada. A couple of good choices are the Canadian iShares SmallCap Index Fund (TSX: XCS) and the Russell 2000 Growth Index Fund (AMEX: IWO). Hanwei Energy (TSX: HE) operates in the Chinese energy market. The company makes fibreglass-reinforced pipelines, coal scrubbers and wind turbines. It’s growing earnings at 40% per year but trades at only 14 times next years earnings.

Comments Cancel reply

loans

Secured loans vs. unsecured personal loans: Which should Canadians get?

Before taking out a loan, learn the differences between these two types, which has better interest rates, and which...

Secured loans vs. unsecured personal loans: Which should Canadians get?

Ask a Planner

RBC’s discount broker launches international trading—what to know before you invest

It’s a first among bank-owned discount brokers in Canada. With more banks likely to follow RBC's lead, what should...

RBC’s discount broker launches international trading—what to know before you invest

Two women sit on the floor with laptops researching HISA rates

Save

The best high-interest savings accounts in Canada for 2024

Whether you want the highest interest rate or no service fees, these savings accounts will meet your needs.

The best high-interest savings accounts in Canada for 2024

Investing

The best GIC rates in Canada for 2024

Find the best GIC rates in Canada. Plus, everything you need to know about how they work.

The best GIC rates in Canada for 2024

A young man in a wheelchair on a beach with a woman and small dog

RDSPs

What is an RDSP?

A Canada Post truck on a snowy street in front of an apartment building

News

Canada Post is still delivering some mail—find out what and when

Volunteers from CUPW will deliver some government cheques during the strike, such as CPP, OAS and the Canada Child...

Canada Post is still delivering some mail—find out what and when

Shoppers on Sainte-Catherine Street in Montreal on Black Friday

News

What’s included in Canada’s GST holiday—and how not to overspend

The temporary tax break will save Canadians money, but financial experts caution shoppers to do the math and avoid...

What’s included in Canada’s GST holiday—and how not to overspend

A woman using the MoneySense Finder tool at her work-from-home desk

ETFs

Buying ETFs in Canada Tool: The MoneySense ETF Screener

Which ETFs should you invest in? Which ones best suit your risk tolerance? What about personal ethics? Check out...

Buying ETFs in Canada Tool: The MoneySense ETF Screener

Banking

If you answer “yes” to these 2 questions, a notice savings account could be right for you

Little figurine men in front of the stock ticker tape

Investing

Making sense of the markets this week: December 8, 2024

Canada bank earnings remain on target, Dollarama’s expectations catch up to it, “insider selling” sets a new record, and...

Making sense of the markets this week: December 8, 2024

Comments Cancel reply

Related Articles

Secured loans vs. unsecured personal loans: Which should Canadians get?

RBC’s discount broker launches international trading—what to know before you invest

The best high-interest savings accounts in Canada for 2024

The best GIC rates in Canada for 2024

What is an RDSP?

Canada Post is still delivering some mail—find out what and when

What’s included in Canada’s GST holiday—and how not to overspend

Buying ETFs in Canada Tool: The MoneySense ETF Screener

If you answer “yes” to these 2 questions, a notice savings account could be right for you

Making sense of the markets this week: December 8, 2024