How To Prevent Taking A Loss Investing In Small Cap Stocks
Despite the fact that Penny Stocks are extremely speculative, they appeal to investors due to the potential payoff. Small caps (given the name because of their small capitalization which is the number of shares outstanding multiplied by the share price) offers traders with a healthy return, on the other hand, can also result in substantial losses. The majority of stocks that trade for $5 or less are considered to be penny stocks – although several small companies trade for more than $10 per share – they just have a smaller float, keeping them in the category of a small cap company. Several companies can trade for below $0.01 – these companies typically have very large floats. Others however have low volume, making it difficult to get filled at the bid and ask prices. Characterized by low regulatory standards and limited listing requirements, small caps are difficult to get information on. We’ve all heard of success stories of penny stock investors who have turned thousands into millions by picking the right penny stocks. A 1 penny move on a 1 cent stock is a 100% profit – effectively doubling your money. Profits of 1000%+ are not unheard of. Needless to say, their potential for moving up very quickly makes penny stocks very attractive to penny stock traders.
There are certain ways to lower the risk factor of investing in this less than $5 stocks. Whether you decide to use software for stock trading or do your own research, there are a few things you should keep in mind. When you start your due diligence, its key to be extremely judgemental when looking at what these companies have to offer. Most of these stock companies are startup companies and do not have a compelling business plan. There are several penny stock sites that offer a newsletter service – the information found therein is a start, not the end of your due diligence. Several companies also specialize in Penny Stock Research. While this information may not be free, it may pay to get a subscription to their service. Another thing to look for are companies who consistently trade a high number of shares each day. Don’t just look at the average of the last 90 days – one spike day throws those numbers off. Look for volumes of at least 500 000 shares traded each day. This not only provides you with liquidity, it shows that other investors are also interested. Before you invest, examine the liquidity of the stock over the last 6-12 months. Using average daily trade volume is a great way to filter out great stocks from poor stocks. The secret to making money with penny stocks is no different than large caps: does the company know how to sell its products or services? These companies use their profit to expand their business and this increases the shareholder value. Companies that are not profitable have to seek assistance with further financing – that dilutes shareholder value. Do your research – you stand to make more money if you do. Small caps are always volatile – its part of the game. Sometimes the stock will drop without any warning. Follow your trading plan – especially with small caps. Manager your risk, follow your plan and you will be fine. Do yourself a favor – avoid the temptation to invest more than 10% in penny stocks.
Everyone loves a “beating the odds” story. It sells newspapers. Remember, this is investing, not gambling. Its not as easy as it seems. Just because someone got lucky with 38 penny stock picks, doesn’t mean its going to happen to you. Use caution. You dont hear about all the people who lost their shirts getting greedy.
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