For the uninitiated, Small cap stocks are dangerous territory. If you’re the conservative type of investor, you will find big cap stocks a better investment and one that, because of their relative stability, will let you sleep better at night.
There are some people, however, who like the thrill of the chase and the opportunity to discover something relatively unknown. If you are one of these, then Small cap stocks may be for you.
Here are some basic guidelines you should follow when investing in Small cap stocks, which will give you a fighting chance in your adventure into Small cap stocks trading.
1. Invest only money that you can afford to throw away or lose. Small cap stocks fluctuate up and down very easily. Investing that hard-earned cash that you saved up for your retirement on these stocks may cause you to develop an ulcer because of the stress of having to watch the stocks. Don’t put your lifetime savings into this kind of investment; speculate only with money that you won’t lose sleep over when you lose it.
2. Do your research. Friends may pass on information about hot tips that they heard about somewhere, or you that you came across in some message board on the internet. Don’t fall for these; investigate the company and its Small caps stocks yourself. If your research shows you that the Small cap stocks are worth investing in, then go ahead and buy it. Don’t believe the tips and the hype, and arm yourself with enough information to be able to recognize when the information is legitimate or just some hype by a paid promoter. People giving so-called tips usually have an ulterior motive, so be careful.
3. Don’t invest in companies that are broken or on their way down. This is not the time for the Good Samaritan act. Focus on companies that have a new innovative product or service, or those whose Small cap stocks are on a consistently upward trend. If Small cap stocks that were selling high before are now selling at a bargain, think twice. Study the historical trend of these Small cap stocks before you jump in to buy them.
4. Check out the people behind the company. A company’s potential for greatness is usually equated with its management. You want people who know how to take the company to the top. Have the people in charge of this Small cap company been involved with other companies in the past? If so, how did they and that company fare? Has the company been sanctioned by a regulatory body? Is the management team qualified? For all you know, the Small cap stocks may be starting off well only because it’s a new thing, but the management doesn’t know how to bring the company further.
5. Find out who owns the shares. Check out who the other shareholders are. How many of the Small caps stocks belong to the management team? Are there any known brokerages that have an exposure to this company? Are there any well-known companies that are shareholders? Big companies and brokerages who are part owners usually make the Small cap stocks a better investment.
6. Get more information about the company on the internet. Find out who is talking about the company, and whether these are legitimate discussions or just hype. Is the company being discussed on the major message boards? Is there any information that sounds suspicious and requires further investigation? You’ll be surprised at how much information good and bad you can find on the internet.
7. Diversify your portfolio. Don’t stick to just Small cap stocks, and don’t put all of your money into just one company. Invest into several companies, and put in only about 10% of your total investment money in any one stock. You’ll find that some will rise and some will tank. Having big cap stocks that are more stable will also enable you to have some steady income from your investment.
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