Traders have given them many names, like bulletin board stocks, micro caps, penny stocks, and others. The attraction to them, however, is all built around the same premise " that the market is on the verge of deciding a particular company is the next big thing. There are a few lessons to keep in mind about trading small cap stocks though.
Five key ideas act as the backbone for consistently successful small cap trading plans.
Though not the only piece of the puzzle, traders who want to get the most out of micro caps must first fully understand one key idea trading and investing arent the same thing. Its fine to be both at different times for different reasons. However, traders should also know that one philosophy requires patience, and the other one requires speed. The two approaches dont mix well.
Secondly, micro cap trading requires becoming comfortable with volatility you may not experience with most large cap stocks. Funds and institutions can buy a substantial amount of a big company like General Electric (GE) or Microsoft (MSFT), and the purchase may not even create a blip on the stocks chart. If a fund or a large number of investors buy or sell the same dollar amount of a micro cap company though, it could mean the entire float gets pushed around. Thats not a bad thing though, if youre on the right side of the action.
Third, successful penny stock traders focus as much on charts as they do on the stocks perceived value. Sometimes these stocks trade at appropriate values. However, just because theyre undervalued or overvalued doesnt mean theyre going to rally or sink. Reading charts will help time optimal entries and exits of stock picks that are based on fundamentals.
The fourth concept micro cap traders need to be comfortable with is that much of the gains from these stocks can be created even before the company turns a profit. Most everyone wants to invest in a worthy concept, even if its not yet creating revenue. However, if enough traders are piling into the same pre-revenue stock based only on potential, it can still drive the stock higher. In other words, hype is a factor worth mentally incorporating into the stock selection process.
The fifth characteristic most successful bulletin board stock traders have is the willingness to take profits. Thats not to say these speculators lock down a gain every time they can, as the longer you can hold a stock the more money you can make. But, too many traders never realize that losing big is far worse than not winning big with absolutely every single trade.
One last thought the pros and cons of trading penny stocks have been debated for years. While on the surface it may seem as if the arguments against penny stock speculation are strong, theyre typically being made by traders who simply didnt understand these five concepts. The top-performing micro cap stock traders are quite aware of these five simple ideas, however.
Bottom line " With the right mindset, anyone can create big profits with small stocks.
Five key ideas act as the backbone for consistently successful small cap trading plans.
Though not the only piece of the puzzle, traders who want to get the most out of micro caps must first fully understand one key idea trading and investing arent the same thing. Its fine to be both at different times for different reasons. However, traders should also know that one philosophy requires patience, and the other one requires speed. The two approaches dont mix well.
Secondly, micro cap trading requires becoming comfortable with volatility you may not experience with most large cap stocks. Funds and institutions can buy a substantial amount of a big company like General Electric (GE) or Microsoft (MSFT), and the purchase may not even create a blip on the stocks chart. If a fund or a large number of investors buy or sell the same dollar amount of a micro cap company though, it could mean the entire float gets pushed around. Thats not a bad thing though, if youre on the right side of the action.
Third, successful penny stock traders focus as much on charts as they do on the stocks perceived value. Sometimes these stocks trade at appropriate values. However, just because theyre undervalued or overvalued doesnt mean theyre going to rally or sink. Reading charts will help time optimal entries and exits of stock picks that are based on fundamentals.
The fourth concept micro cap traders need to be comfortable with is that much of the gains from these stocks can be created even before the company turns a profit. Most everyone wants to invest in a worthy concept, even if its not yet creating revenue. However, if enough traders are piling into the same pre-revenue stock based only on potential, it can still drive the stock higher. In other words, hype is a factor worth mentally incorporating into the stock selection process.
The fifth characteristic most successful bulletin board stock traders have is the willingness to take profits. Thats not to say these speculators lock down a gain every time they can, as the longer you can hold a stock the more money you can make. But, too many traders never realize that losing big is far worse than not winning big with absolutely every single trade.
One last thought the pros and cons of trading penny stocks have been debated for years. While on the surface it may seem as if the arguments against penny stock speculation are strong, theyre typically being made by traders who simply didnt understand these five concepts. The top-performing micro cap stock traders are quite aware of these five simple ideas, however.
Bottom line " With the right mindset, anyone can create big profits with small stocks.
About the Author:
John Monroe has devoted over 20 years to understanding and effectively analyzing small cap stocks poised to create above average returns. If you would like to receive timely penny stocks trading ideas like the ones described above, the Small Cap Network newsletter is a tremendous free resource and starting point toward uncovering hidden gems in today's dynamic market environment.
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