Investing In Small Cap Stocks - 3 Points To Consider
James Woolley
March 03, 2009
Buying small cap stocks can be very risky. There are lots of companies that look like they may have a fantastic future, but sadly many of these companies will ultimately fail to deliver and either stagnate or go bust. So if you are looking to buy some small cap stocks, I would recommend you take the following three points into consideration.
1. Company News
The trouble with many small cap stocks is that sometimes even with all the excitement and hype surrounding a particular company, the share price will still fail to take off. In fact it can spend months and months drifting aimlessly and not going anywhere at all.
This is why you should pay attention to any news releases, whether it's the reporting of results or just a trading update. It's very often these news releases that kick start a share into life so pay close attention to any announcements made by your companies.
2. Volume
Changes in volume is a massive clue that a share is about to move strongly in one direction or the other. In fact this is related to the last point because often these volume spikes come in the middle of a long period of consolidation. So therefore you know that there is some company-specific news in the offing which could dramatically move the share price.
3. Breakouts
Breakouts are one of the most profitable ways to trade shares generally. However when small cap stocks break out of an established trading range, it's usually even more profitable. This is because on a percentage basis the gains are much larger than on the large cap stocks.
Also in many ways these breakouts become a kind of self-fulfilling prophecy. This is because many of the individual investors will notice this breakout and will jump on board pushing the price even higher. On small cap stocks that are often lightly traded, this can result in huge gains in a matter of just a few days or weeks. In fact gains of 50-100% are possible on occasions when there's enough momentum behind a particular breakout.
So overall although I wouldn't recommend you spend too much of your capital buying small cap stocks, if you do decide to do so, you should take these three points into consideration because they can prove to be very profitable.
If you are interested in opening an account with an online broker, please click here to read a complete review of Zecco and to read a full TradeKing review.
1. Company News
The trouble with many small cap stocks is that sometimes even with all the excitement and hype surrounding a particular company, the share price will still fail to take off. In fact it can spend months and months drifting aimlessly and not going anywhere at all.
This is why you should pay attention to any news releases, whether it's the reporting of results or just a trading update. It's very often these news releases that kick start a share into life so pay close attention to any announcements made by your companies.
2. Volume
Changes in volume is a massive clue that a share is about to move strongly in one direction or the other. In fact this is related to the last point because often these volume spikes come in the middle of a long period of consolidation. So therefore you know that there is some company-specific news in the offing which could dramatically move the share price.
3. Breakouts
Breakouts are one of the most profitable ways to trade shares generally. However when small cap stocks break out of an established trading range, it's usually even more profitable. This is because on a percentage basis the gains are much larger than on the large cap stocks.
Also in many ways these breakouts become a kind of self-fulfilling prophecy. This is because many of the individual investors will notice this breakout and will jump on board pushing the price even higher. On small cap stocks that are often lightly traded, this can result in huge gains in a matter of just a few days or weeks. In fact gains of 50-100% are possible on occasions when there's enough momentum behind a particular breakout.
So overall although I wouldn't recommend you spend too much of your capital buying small cap stocks, if you do decide to do so, you should take these three points into consideration because they can prove to be very profitable.
If you are interested in opening an account with an online broker, please click here to read a complete review of Zecco and to read a full TradeKing review.
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