Microcap stocks, also known as penny stocks, are stocks that are trading at less than $5 each with small market capitalizations typically under $300 million. Many of these types of stocks are more accurately defined as speculations rather than investments. They have no earnings or predictable cash flow, and can’t be evaluated in the ways that Benjamin Graham or Warren Buffett may value a company. This infographic covers some of the ins and outs of trading such stocks, and many of the ideas presented can apply to junior mining, energy, and technology stocks.
By Timothy Sykes ( timothysykes.com) under the original* title Penny Stocks 101.
(About Timothy Sykes: I became self-made millionaire by the age of 21, trading thousands of penny stocks – yep you read that right. penny stocks. You may have heard the story: I turned $12,415 into a cool $1.65 Million over a couple years – and I’ve made millions more since then.)
The following is an introduction** to the infographic by Jeff Desjardins (VisualCapitalist.com).
From a potential downside perspective, many of the companies in this category can be risky, unpredictable, and thinly traded. However, for savvy speculators, these same stocks can provide upside that is hard to match. It is all about the approach. Doug Casey, a legendary speculator, is well known for saying that he would rather risk 10% of his portfolio for a potential 100% gain, rather than 100% of his portfolio for a 10% gain.
Microcap stocks are inherently volatile, but for those that can stomach it, there is a big profit opportunity. Furthermore, hidden in the market are companies that do have game changing plans or discoveries that could see their valuations rise more than 10x (a ten-bagger, as industry people call it). The key is being able to put in the time, due diligence, and using the right strategy to discover these companies. Being able to let go of opportunities that did not work out by cutting losses early can also be a key.
The infographic below covers some of the ins and outs of trading such “penny” stocks.
Conclusion [from Timothy Sykes]
Penny stocks are volatile and thinly traded, but with the right strategy can produce major profits for savvy investors. As you continue to develop your knowledge base, it’s critical to install a set of rules like the ones featured in the above infographic. Lastly, when it comes to penny stocks, learning to identify trends and patterns, and act on them before they unfold, is what separates winners from losers.
Original Sources: *http://www.timothysykes.com/2014/12/penny-stocks-101-infographic/ (2007-2014 TimothySykes™ All Rights Reserved.) **http://www.visualcapitalist.com/penny-stock-investing-101/ (Copyright © 2014 Visual Capitalist | All rights reserved.)