While the stock market is currently more volatile than it has been for a while, now may be the time to allocate more of your portfolio to small caps and micro-caps. This is not a blanket statement. Utmost caution should be applied and with very little coverage or media attention given to these stocks, which small cap company to invest in can be a difficult decision – certainly more difficult than which blue chip to put your hard earned money into. The fact is most small cap stocks make for poor investments, so seek financial advice, do your own due diligence and then devise a strategy to help you pick the few you have confidence in. Of course, this is a basic checklist and applies to all stocks. However, it will make your small cap selection easier. The five point checklist for better investing. 1. Buy right – a low price may not be a cheap price. That’s right, just because a stock price is at a low ebb, doesn’t necessarily mean it’s cheap. What you want to look at is the value of the investment. Take a look at how many shares are on offer, combine that with the market capitalisation —what the market thinks the company is worth – and then factor in the company’s assets, its earnings or potential for future earnings, and its peers. Peer comparison is important. If the company you are looking at has similar assets and earnings, then it’s worth asking why the company you are looking at is priced below peer value. 2. Know what you’re investing in. You may have heard about a company through a friend, or read about it in an article, however what do you really know about the company? The questions you need to ask if considering an investment are: what industry does the company operate in? Do you understand the industry? How does the company make money? If it isn’t making money, how does it plan to make money? Is it turning a profit? What are the outgoings compared to the incomings? Is it being used just to pay management’s salaries? When is it forecast to make a profit? Understand the business, before investing in it and if you don’t understand it, find a business you relate to. 3. Know who’s running the company. The success of any company is in large part down to the management team. This is especially the case with small companies (listed or not). It is imperative you check the background of all directors in the company. Examine their track record: have they been previously responsible for running a successful company, or involved in major company transitions. If you find a director’s past to be questionable, get out before it’s too late. One final thing to take into account is how much ‘skin in the game’ a director has. This means how much a director is invested in the company. A director’s interest can be highly revealing: every time a director buys or sells shares, it has to be reported to the ASX within three days. You can review the latest Appendix 3Y to make sure that management isn’t bailing and selling up. While doing this, it is also worth checking who the major shareholders are. Not only should you be looking for how many shares managers have, but the power of other investors including large fund managers, foreign billionaires and even rich listers. 4. How much cash does a company have? Cash flow statements are important, particularly for small capped businesses. A clear picture of revenues, expenses and cash backing, will indicate the true cash profitability of a business, and if or when it might need to raise capital. Does the company have sufficient cash in the bank to fund its growth, or does it need to raise capital? Raising capital will often dilute your shareholding. Not all capital raisings are bad, however. If the company has a tangible growth strategy and you can see what the cash will be used for, don’t throw it on the trash heap just yet. 5. What do the share price fluctuations mean? Buying stocks when the price has fallen to a record low, or is in a steady downtrend may not be the best idea. You wouldn’t catch a falling knife, right? It’s not out of the question to do so, but you’ll need good reasons. For instance, a new management team could turn the business around, along with a strong acquisition strategy, or overall improvement in the general sector. Essentially there are two things to consider when looking at what might affect the share price: is there a reason for long term negative impact or are market fluctuations causing the price to dip. If it’s the latter, this could present a buying opportunity, but you should seek professional financial advice before making that decision. This update is not financial advice. This article is general news and information. Home Loans: The comparison rates are based on a secured loan amount of $150,000 and a term of 25 years. Personal Loans: The comparison rates in this table are based on a loan of $30,000 and a term of 5 years unless otherwise indicated in the product name with^, in which case, the comparison rate is based on a loan of $10,000 and a term of 3 years. The comparison rates are for unsecured personal loans only for the relevant amounts and terms. The comparison rates for car loans and secured personal loans are for secured loans unless indicated otherwise. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products. The products compared in this article are chosen from a range of offers available to us and are not representative of all the products available in the market and influenced by a range of factors including interest rates, product costs and commercial and sponsorship arrangements InfoChoice compares financial products from 145 banks, credit unions and other financial institutions in Australia. InfoChoice does not compare every product in the market. Some institutions may have a commercial partnership with InfoChoice. Rates are provided by partners and taken from financial institutions websites. We believe all information to be accurate on the date published. InfoChoice strives to update and keep information as accurate as possible. The information contained on this web site is general in nature and does not take into account your personal situation. Do not interpret the listing order as an endorsement or recommendation from us. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.