6 Tips for the Small-Cap Investor

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- When investing in small-cap stocks (and really any other asset class for that matter), you face two basic levels of decision-making:

1. Select candidates you believe offer the most value and growth potential.
2. Time your buy-and-sell decisions to maximize profits, and minimize losses.

Let's assume you've already done step one. I always suggest maintaining a watch list of stocks that you want to buy. This significantly increases your odds of investing success because let's face it, the precise minute you learn about a company's existence is unlikely to be the best time to buy the stock.

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For step two, remember that to some degree, use of limit orders and stop-losses will help to protect you from big losses. But due to the higher-than-average volatility of small-caps, you need to be ready to spot other trends that will impact the success rate of your buy-and-sell decisions.

Here are six useful tips that will help:

1. Set profit goals and bailout points. This gives your investment strategy some structure. Buy when trends meet your criterion. Either the price meets your pre-determined range, a trend-line changes direction, or there is some change in the broader market. There are virtually hundreds of criterion to chose from, but remember to use ones that support your particular profit goal. Then sell when you reach your predetermined profit yield -- or when the stock price drops to your bailout point. Remember: if you don't have a goal from the beginning, how will you know when, or if, the investment is a success?

2. Decrease your holdings after a big run-up. Often stock prices rise and you reach your goal, but you want to believe that the upward trend is going to continue. You can cut potential losses by selling a portion of your holdings, and letting the balance ride. Your investment time horizon will dictate this timing to a large degree.

3. Use trailing stop orders to control potential losses. Losses happen a lot faster than gains in most cases. Carefully watch fundamental and technical trends, and look for early signals of change. Protect yourself by using trailing stops to set a floor on your potential losses, or to lock in your predetermined percentage gain.