What is the small company effect?
The small company effect
is the idea that investing in the shares of small companies, such as penny stocks, will outperform investing in the shares of large companies.
In other words, the smaller the companies in your portfolio, the greater the returns should be, Sean Keyes in Penny Sleuth
Investing in small companies can make a massive different to your long-term returns.
You invested $1 in the US stock market back in 1955:
It you’d invested in large companies, by 2013, you’d have made $3,919.
If you’d invested in small companies, you’d have made $29,400.
And if you’d invested in penny stocks, you’d have made $48,090.
The figures are similar for the UK stock market.
This shows you the impact of the small company effect. This is the difference investing in small companies with big ideas can make to your returns.
The small company effect can benefit you if you’re willing to take on more risk investing in penny stocks. You can make a lot of money.
How to find penny stocks to make the most of the small company effect
The key is finding penny stocks that give you the best chances of making money.
Like investing in any share, you need to do your homework. When it comes to penny stocks, you’ll probably have to do more digging.
You want to ensure you’re investing in a financially sound company, with fantastic products or services, with a team capable of taking the company there.
Investing in penny stocks isn’t easy. You will likely invest in some that don’t go anywhere. But the ones that perform well should more than make up for that.
So there you have it. How you can benefit from the small company effect by investing in penny stocks.
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