Considering Buying Microcap Stocks: Consider This First
Wehave all heard about the financier how bragged about his 100% or 1000% return on a stock or about the fellow who made it rich by making an investment in tiny caps, undiscovered stocks that made it huge. In theory, it appears to be too straightforward. Invest in a couple of penny stocks, then sell them when they move up. Unfortunately, it is too easy. Too straightforward to lose money unless you know what to search for. Here are a couple of things to look for when buying penny stocks.
First, lets have a look at what kinds of corporations trade on the OTC BB or Pink Sheets.
Stocks that no longer trade over $1 on the Naz
These include firms that fell from grace ( Enron ). While it is possible that they may see better days in the future, the percentages are stacked against them. Its often best to avoid trading these stocks. If you are feeling the temptation is too much, wait until the stock starts to rebound. If you try catching a falling knife, youwill get hurt .
New Start Ups
Each year there are hundreds if not thousands of companies who decided to come clean. Whether they need the money to grow their business, or are looking to cash out their equity, its a natural progression for a company with a compelling story, and a great track record to go public. While plenty of these corporations will file for an IPO, many others will start off trading on the OTC BB as a penny stock
2nd, lets look at some pointers that may help the penny stock trader avoid making pricey mistakes.
Due Diligence
Stocks listed on the Pink Sheets don’t have to file annual or quarterly statements. This makes starting your due diligence difficult. Often , the information is flaky at best, and typically , its biased. You should expect ashareholder to assert good things about the company. If the company failed to have potential, they wouldn’t be holding it. Or, theywould be hoping to unload their stock and hope to talk you into buying.
Stocks mentioned on the OTC BB file annual and quarterly statements. This provides some degree of financial success. You will find most penny stocks lose money, whether thru managerial incompetence, or research and development. The key is to identify the companies whose executives have a record of solidly making money, or at the least, delivering on their business plan, and decreasing costs.
Penny Stock Newsletters
Being a writer for The Market Edge 360 ( http://www.1source4stocks.com ) puts me in a biased position when chatting with penny stock newsletters. Here’s what I’ll tell you : be careful! Check the disclaimer for the amount the newsletter is being paid to hold the profile. Are they being paid in cash or in shares? You will probably find a correlation between the quantity of shares they’re being paid, and the rating on the hype meter. Does that mean that you need to avoid any stock where the company is paying IR professionals in shares? No. Just bear in mind that they are selling a story, and if they sell the story to other stockholders, they will gain. This is not difficult if you get in early, but may be a problem if you aren’t in a position to jump in right away.
take a look at the track record of the newsletter. Have they profiled winners? Do they state the facts, or state the hype? Do they also offer unpaid stock profiles? If they do, you will likely find that they do their own research in all corporations, and are looking to make sure that they aren’t passing a puny stock your way just to pay the bills.
If a company is paying an IR professional money to profile a stock to its subscribers, should you avoid it? Of course not. Think of the payment as advertising. They’re promoting the company, and trying to get exposure. Like any company, the sole way to get exposure is thru some strategy of advertising. So don’t dismiss a paid profile as hype. Keep it in the back of your intelligence while you are reading the profile, but focus on the profile. You can find a diamond in the rough that no one has uncovered.
Volume
If you would like to make cash, you have to be in a position to buy and sell enough shares to fasten in your profit, or protect your capital. If ABC company’s daily volume is only 5 hundred shares a day, it may take you several days to acquire a position worth taking. If there’s bad news, who’s going to buy your shares? If the volume is low, keep away. It isn’t worthwhile. If you are feeling that strongly about owning the company, think about contacting the company without delay and working out a deal.
Buy Results, Not the Hype
If you purchase the hype, percentages are, you will end up being the last one to have the shares, while everyone else has sold off their position. Look at a company, have a look at what their business plan was, and confirm if they have followed thru on that plan. Were they successful? Did they bring a product to market on time? Did the company follow through on its acquisition strategy in the way they set out? The hype might get you aquick pop unless you are watching your trading screen each 2nd of the trading day, you’ll miss out.
Size matters
There are thousands upon thousands of penny stocks. The size of your position should not be anymore than $2000 - $3000. While this may not seem like much, keep in mind that it is not weird for a $0.10 company to fall to $0.05. That could be a 50% loss. If your position is $10 000, a50% haircut leaves you with only $5000. Keep your losses to a minimum. If the Corporation has done well, and you are up, either take your profits off the table, or add to your position, and be sure to reset your stop loss so as to protect your prior profits. Capital preservation is the secret to successful trading.
Have a plan before you buy. What are your reasons for buying. What’s your exit strategy? Where is your stop loss? When will you are taking your profit? Write down these answers before you place that buy order.
Penny stock investing can be profitable. Remember, you are taking bigger hazards than you would if you were purchasing stocks in a bank stock. That risk can be rewarded with returns that you cant get with a bank stock, or, it’ll be met up with a big loss and a bad taste in your mouth for making an investment in penny stocks.
Do your homework, do not accept the hype, and protect your capital. How does the stock market work?? While it may appear that its all about taking your money away from you, its actually all about smarter traders making money from the greedy traders. Dont get greedy and you’l;l make money.
You Had Better Take Heed of These Tips on Trading
On the top of my list is a tip which I consider to be more important than any other – never consider trading to be the same as investing, and never get caught up in any of the traps of this sort of concept.
The primary reason for so many people associating trading with investing is because they tend to initially discover trading through the stock market.
Of course, as with investing, trading also requires that you put your money at risk in order to receive good returns but simply following this course of action doesn’t mean you’re investing.
Rather than compare trading with investing, one should pay attention to the similarities between trading and gambling such as:
• Wagers are always being placed
• As with gambling, the pace is always fast
• The action never stops
• Chance or probability always plays a part in the outcome
• Just as gamblers have to deal with uncertainties such as the cards and dice, traders are faced with political or market related uncertainties
• There are high risk trades just as there are high risk games
• Emotions can have a severe impact on the outcome
• Traders want to conquer the markets while gamblers want to beat the house
• The majority of people loose most of their money
Can’t see how trading can be compared to wagering?
Do you remember a movie called “Trading Places” which starred Eddie Murphy? Anyway, he was recruited by two commodity brokerage owners and when they explained to him how the markets work, Eddie’s response was “You’re bookies”.
Of course when Eddie starts giving sound trading advice, it’s not because he knows anything about trading, but rather because he understands how betting works. Providing you’re willing to see that trading is betting, you’ll be in the right frame of mind to start trading.
So, you’re actually getting into a betting game rather than some high yielding investment because each time you buy or sell, you’re actually placing a bet as to how the markets will behave.
One of the primary differences between gambling and trading lie with the fact that you’re stuck with a bad bet if you make one but with trading, you can usually get out of a bad trade simply by making another trade. Irrespective of how absurd a wager might be, you’ll nearly always find someone who is willing to take a chance, especially those who are new to the game.
Of course, as some markets experience greater activity than others, there’s always a possibility that you may not find a gullible trader to take your bet.
Being able to keep your head screwed on properly is by far the most challenging aspect of trading, rather than placing trades.
Unfortunately the real nature of trading tends to be over-shadowed by all the accompanying hype. The fact is though, trading is betting!
Let’s face it, not many people would instantly give up their regular jobs in exchange for earning a living with gambling, and this is what really amazes me, because there are so many people out there with zero trading experience, but who think they can earn a great living through trading. The truth however is, they’ll be sorely disappointed.
Just as you get professional gamblers, you get professional traders, and just as you get those who thing they are gamblers, you get those who think they are traders.
The definition of gambling as shown in various dictionaries:
I. To expose oneself to hazard (risk)
II. To engage in reckless or hazardous behavior
III. An act or undertaking of uncertain outcome
Let’s see how these dictionaries define “calculated”
I. Determined by mathematical calculation!
II. Undertaken after careful estimation of the likely outcome!
III. Made to accomplish a certain purpose; deliberate!
Finally, let’s see what these dictionaries say about the word “risk”:
I. The possibility of suffering harm or loss; danger.
II. A course of action involving uncertain danger.
III. The variability of returns from an investment.
IV. The chance of nonpayment of a debt.
Real traders always aim to be ahead when they reach the end of the month and this can only be achieved if they stick to their rules and to their systems. Of course they take trading risk%s but they take calculated risks and believe me, the keep a close eye on those risks as well.
The truth of the matter is, gamblers gamble while traders take calculated risks. They know the markets and they have their own system in place which they follow. Most importantly, they realize the importance of being well prepared.
For the most part gamblers tend to fail, both in the gambling arena as well as in the trading arena. The inevitably get caught up in all the excitement and as a result they fail to play be the rules. The act on impulse rather than base decisions on calculated risks.
My final tip is that you behave like a trader with good trading psychology in that your top priority is to earn consistent profits. Don’t be tempted to take uncalculated risks simply for the thrill of doing so.
