Buying a Basket

When institutions (Hedge Funds, Mutual Funds, Money Managers, etc.) decide their going to invest in micro-cap stocks they rarely buy them on an individual basis but more often purchase them in “baskets”.

What this means is that if they want to own sector specific companies like biotech, for example, they will decide on the total allocation and spread it out equally over a number of companies in the same sector.

For example, if the total dollar allocation for an institution is $10MM and they want to own some micro-cap biotech’s they most often will spread that money out over say 15 different companies in the same sector. So for the example above, if they purchase 15 micro-cap biotech stocks each would likely get an dollar amount allocation of between $650,000 to $675,000.

The reason institutions buy a “basket” of similar stocks is because they know with the risk associated with micro-caps many of these companies will likely fail. However, if they have 6 stocks that perform very poorly, another 7 that either break even or lose some money and 1 or 2 stocks that end up being large percentage gainers they can do very well based upon their original allocation amount.

Individual investors may have much less dollar amount for an allocation into micro caps but can certainly use this strategy to diversify within the same sector should they find an individual stock they really want to own.