A Guide To Trading Penny Stocks And Small Cap Stock Stocks

Small cap stocks, bulletin board equities, penny stocks ” call them whatever you want. Many of them hold the promise of great fortune. The challenge for investors is distinguishing the winners and losers, and then maximizing that promise. Its not an impossible task though not in the least.

While volumes of books have been written on the matter, five core principles may be more than enough to really establish a framework for success in the penny stock market.

Successful penny stock traders must first grasp the difference between trading and investing. Sound simple, doesnt it? Yet, its surprising how many novice traders waffle between one approach and the other for each and every trade. Its difficult to make any net progress with a portfolio by trying to have your cake and eat it too.

Secondly, micro cap trading requires becoming comfortable with volatility you may not experience with most large cap stocks. Funds and institutions can buy a substantial amount of a big company like General Electric (GE) or Microsoft (MSFT), and the purchase may not even create a blip on the stocks chart. If a fund or a large number of investors buy or sell the same dollar amount of a micro cap company though, it could mean the entire float gets pushed around. Thats not a bad thing though, if youre on the right side of the action.

Thirdly, charts are just as important as fundamentals when it comes to penny stocks and bulletin board equities. The fundamentals may look right, but these stocks can and do get stuck at inappropriate prices if too few investors are watching that particular stock. So, charts can help spot the early stages of rallies or selloffs.

Fourth, small cap stock speculators should recognize theyre in a competition of sorts with other small cap speculators. Plenty of profitable companies see their stocks sink, and plenty if unprofitable and pre-profit companies watch their stocks sky-rocket. This is because all the games players are trying to beat one another to the punch, so you also have to think about how your opponents are thinking.

Fifth, great penny stock traders will lock in profits least every now and then. Yes, you have to be willing to hold onto a stock to achieve the multi-year, mega-gains offered by a company like Microsoft (MSFT). However, those huge hits are few and far between. For every success story like Microsoft there are also three more stocks that were wildly profitable for a brief period, and then fizzled. They were still a profit opportunity though.

One last thought the pros and cons of trading penny stocks have been debated for years. While on the surface it may seem as if the arguments against penny stock speculation are strong, theyre typically being made by traders who simply didnt understand these five concepts. The top-performing micro cap stock traders are quite aware of these five simple ideas, however.

The point is, lots of traders are reaping huge rewards with penny stocks. You can be one of them with just a little bit of focus.

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