Small capitalization stock derives from small capitalization company that has capital not more than one billion dollars. It stock is called penny stock. The stock price is not a penny even the stock name is penny stock. The price of penny stock is under five dollars. In United Kingdom, penny stock price is around one poundsterling, meanwhile in France; the penny price is around one euro.

The penny stock could not register in local and national stock exchange like New York Stock Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange, etc. You can buy or sell the penny at the over the counter (OTC). You should realize that penny stock is illiquid. Therefore, we must be patient for waiting the buyers.

In my country, almost the stock has price under $ 5. If the price rises over $ 5, the company will stock split. Only dozen companies that have stock price over $ 5 in my country stock exchange. Unlike USA, the investor likes cheap stock. My country SEC could receive the small capitalization company at the stock exchange. For information, in my country there is no over the counter (OTC).

Since the small capitalization only has small capital, the stock is risky. You can loose your money at small caps stock because there is no side who guarantee your money. On the other hand, you can get more return at small caps stocks too. You should analyze the stock before buying it. This investment fits with aggressive investor. The small caps stock has prospect to become a conglomerate company. The aggressive investor thinks the large company like IBM and Exxon Mobile was a small caps company along time ago.

The Stock Exchange commission also has right to watch the penny stock trading. Therefore, there is no one who watches the hazard company. The small cap has no obligation to report the financial statement so the small cap company has unique financial statement and the small cap has no standard financial statement. On the other hand, the company that list in the stock exchange must use standard financial accounting statement (SFAS). The company must audit the financial statement to the public accounting office.

Writer never suggests the investor participate at small cap initial public offering (IPO) because it could loss you. The small caps offer the price more than the market value and you can hope the stock will rise in sort time. You should deny private company IPO with small capitalization stock because it is riskier small caps stock.

Tips Investing in small caps

Small caps stock or penny stock is an alternative investment for the investor with little money. Since the small caps has lower market capitalization or below $ 1 billion dollar, the investor guesses that small caps is the higher risk stock.

The OTC does not set minimum requirement when a company issue the stock. The small caps stock does not have to report the financial statement. Therefore, you do not confuse that every company has no standard financial statement.

We can buy small caps or penny stock at the Over the Counter (OTC) through broker. Today the OTC has large market than NASDAQ. The broker will furnish you with Schedule 15G. The schedule 15G is several sales practice requirement for broker transacting in penny stock. The OTC provides stock that could not register at national or regional exchange. Unlike the exchange, The OTC does not disclose the penny stock price.

You can find stock quotation at over the counter Bulletin Board (OTCBB). The OTCBB provide display information like last price, real time quotes, and value information at OTC. The OTCB include national, regional, and foreign equity issues. The OTCBB operates like NASDAQ but both of them have no relationship.

There some tips that may help you are:

1. You should find trust broker. You must sure that broker will not run with your money. The broker must have experience at small stock so he/she can help you to get return. You need broker to get information from OTCBB because the investor is forbidden to get direct information.
If you find the fraud broker, you can contact State Securities Regulator or contact the SEC's Office of Investor and Education Assistance.

2. You should diversify your small caps stock. The small cap has large industry too. Therefore, you can buy dotcom stock, utilities stock, telecommunications, oil supplier, etc.

3. You should not forget fundamental analysis. You must also check the prospectus of the stock whether profitable or not. The small company could grow to large company. If you are clever, you can catch this opportune. You can look at Return of Investment Capital (ROIC). The potential small caps has ROIC higher than 25%, Return on Equity (ROE) ranging 20% to 25 % and solid free cash flow margin around 5%. You should avoid the company with high debt or have debt to equity ratio up to 30%.
Since the small caps stock does not have accounting standard, you must be very careful to make judgment. If you an accounting, you must know that.

4. You should buy at the lower price so you can sell at the higher price. Therefore, you must often consult with your broker.