How You Can Use Small Cap Stocks to Beat the Big Money - And Make Big Money

These type stocks have outperformed the S&P 500 for the past several years. While many market pundits preach the virtues of big cap blue chips, the fact remains that the these type stocks are almost always the best investments.

After all, companies like Microsoft (MSFT), Cisco (CSCO), and even Wal-Mart (WMT) were small cap stocks at one point. The key is to find the stocks that are going to turn into big cap stocks, and make you a ton of money in the process.

What Are Small Cap Stocks?

But first, we have to answer the question, "What are these type stocks anyway?"

The answer depends on who you ask. Some people say that these stocks are any stocks with a market capitalization of under $2 billion. Others might set the cut-off as low as $300 million to qualify as small cap stocks.

The point is that stocks are classified as big cap, medium cap, or small cap stocks based on the total value of their outstanding shares - market capitalization (also known as "market cap").

For example, a stock trading at $2.50 per share with 100 million shares would have a market cap of $250 million. Another stock that had a $40 share price with only two million shares would have an $80 million market cap. Most people would consider both of these small cap stocks.

Mico-Caps - The Smallest of All Small Cap Stocks

Equities magazine is a quarterly publication that almost exclusively covers these stocks.

In fact, some people think that companies need to have a minimum market cap to even be considered small cap stocks, and that anything under that should be considered "micro-cap." Equities is one of the few periodicals that cover these companies.

Recently, Equities sent out two bulletins touting the these stocks, Biophan Technologies (BIPH) and Callisto Pharmaceuticals (KAL). Biophan has a market cap of just $85 million and Callisto's is only $45 million.

If this seems like a lot, consider that Microsoft's market cap is nearly $240 billion, or more than 533 times that of Callisto. Even Sirius Satellite Radio's (SIRI) market cap is $6 billion.

If you're interested in learning more about Biophan, note that it, like many other of the smallest stocks, is not traded on an exchange. Instead, it is traded over-the-counter or "OTC."

This means that you may have to enter BIPH.OB as its ticker symbol in order to get a quote. Callisto is traded on the American Stock Exchange, so you won't have a problem finding out more about it.

How You Can Use Small Cap Stocks to Beat the Big Money - And Make Big Money

Big money institutions - mutual funds, hedge funds, and pension funds - rule the market. When they buy, stocks go up. When they sell, stocks go down.

For example, Barclay's Capital Management, a UK-based institutional investment firm, owns over 400 million shares of Microsoft - that's 4 percent of the entire $240 billion company.

Can you imagine what would happen to Microsoft's share price if Barclay's decided it wanted to get rid of 100 million shares? How about 200 million or all 400 million? Obviously, it would have to do so very slowly and gradually, or else the market for Microsoft's stock would crash.

On the other hand, what would happen if a multi-billion dollar institution wanted to buy shares of Microsoft? It could buy a million or so shares a day - about $23 million worth - without disturbing the market much.

But imagine if the same institution wanted to buy shares of a couple of stocks like Biophan and Callisto? Investing even a few measly million at once isn't worth a big institution's time, and investing as much as $20 million into small cap stocks worth a total of $45-85 million would cause their share prices to skyrocket.

The trick is to find the right stocks and take a small bet on them. If you normally invest $5,000 into your more serious investments, put $500 each into a couple of small cap stocks.

Then, if you find the right ones, the prices will go through the roof when the big institutions discover your hidden gems. Using this strategy, you can beat the big money and make the big money at the same time.