What You Need To Learn About Small Caps
By: Christopher Smith | Posted: 28th December 2006
Most traders think of the major stock exchanges when trading stocks comes to mind. The New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX) are among those that first come to mind. Often overlooked by the mainstream media, micro cap stocks are a low ticket security for companies that are valued at under five hundred million dollars and often trade in low volumes. These stocks also trade on 'Over the Counter' exchanges such as the OTCBB or Pink Sheets.
The very fact that microcaps trade at such low volumes increases the risks involved in investing in them. or selling too low. Also, its very difficult to get accurate share prices, which may result in losses for you.
Despite the risks involved, small caps are often attractive investments to investors for various reasons. If you are new to investing and looking for the chance to return a high yield for a relatively low investment you are likely to come across some micro cap stocks. Its not surprising that speculators are attracted to microcaps. A move of a few hundreds of a penny can mean big returns for you. For a $0.10 stock to move up 20% requires a move of only $0.02. If the stock moves to $0.20, you have doubled your money. If the stock starts to move, you can double or triple your money within days. You won't find that kind of return on the major stock exchanges.
the price of microcaps can drop just as drastically and equally fast. Those who are inexperienced investors would do well to avoid micro cap stocks until they have a better understanding of how things work. It is also important to note that because of the relatively low 'worth' of the companies that are often listed on the OTC they are often considered questionable investments. Some of these companies have such a limited financial history that no accurate determination of their actual value can be made. Many of these companies are either very new or dangerously close to bankruptcy.
There is also a strong potential for fraud with some buyers artificially 'enhancing' or driving the costs by buying large amounts of shares and raising the perceived value of essentially worthless stocks. Most speculators who fall for this lose many when it comes time to sell.
Most financial advisors will suggest not investing more than 10% of your portfolio on micro cap stocks
Before you decide to avoid micro cap stocks, remember, that not all of them are ripe for fraud and manipulation. Many companies seek to expand the growth of their business by seeking out investors who are willing to fund that growth, in exchange for shares in future success. Many of these companies will find themselves off OTC listing and move onto larger exchanges.
Learn more about learn how to trade micro cap stocks or trading futures at http://www.1source4stocks.com
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Tags: amex, american stock exchange, pink sheets, trading stocks, financial history, york stock exchange, new york stock, new york stock exchange, mainstream media, small caps