mahikarnam

Wall Street tends to be focused on a minority of large cap stocks - after all, that's where the investment banking (and big profits) are. As a result, small/micro/nano-cap stocks (however you want to classify them) with solid fundamentals and great investment potential are sometimes left to languish without a way to get their story to individual investors. The challenge for investors is to find reliable sources of information on these "undiscovered" stocks.

Why Is Wall Street Focused on a Small Number of Big-Cap Stocks?
Wall Street focuses on a very small number of big cap stocks because that's where the money is and because mergers eliminated independent regional brokerage firms that used to support small cap stocks. Investment banking now drives profitability, and the bigger deals have the biggest margins. At one time, trading desks generated reasonable profits, but regulatory changes and competition narrowed spreads to miniscule levels. As a consequence, brokerages make a market in only the most liquid stocks (which are also big cap names) in order to generate enough volume to justify their existence. With every investment banker vying for the same deal, research coverage has become a lemmings' market with everybody following the same stocks.

Merger activity cut down small regional brokerage firms that provided financial support to small cap stocks. These regional brokerage houses provided investment banking, market-making, and research coverage to companies in their market area. This provided small cap firms with access to capital and a growing shareholder base. As larger brokerage houses and banks acquired these smaller firms, however, their activities were redirected to the large cap sector. Companies that do not meet a specific market cap or do not have the potential to yield a sizable investment banking deal are sometimes dropped from coverage lists as a result.

To illustrate this trend, take a look at the Baseline database to compare market cap and analyst coverage as of January 5, 2001. Baseline has almost 10,400 stocks in its database and contains the stocks in all the major indexes as well as ones suggested by the Baseline subscribers who are analysts and portfolio managers. Because part of the database consists of stocks recommended by individual input, it also provides a perspective on what is deemed interesting by the users