Micro caps along with small cap stocks are suitable for speculators. When choosing to invest either short term or long term, one must scrutinize possible outcomes. It is sheer gambling to put your money at risk without calculating certain variables. Therefore you must consider the following points before investing in small cap stocks.
Clarity of Goals:
One should be clear about one’s own risk tolerance, industry knowledge, trading goals, and trading skill.
Short-term or Long-term Investment:
Before investing one should decide if he is looking for quick gains with probable risks or willing for a long term investment. Analysis is extremely different for both the cases. For example, Warren Buffet is a set-and-forget type long term investor where he thoroughly researches a company’s management, financial’s and more before marrying his investment for the long term. However, a short-term investor needs to be accessible and know about current market news trends to make fast gains.
Designate Risk Capital and Become Proficient:
Allocate a specific sum of risk capital to invest. This amount should be the one you could lose without jeopardizing yourself in the worst case scenario. Gather maximum knowledge about the particular stock industry. It will help you make better decisions and prepare for the tough times.
Diversify and Make Purchase and Selling Decisions Smartly:
It is better to invest the money in multiple companies than just one. A rule of thumb, unless you are already an expert trader, is to risk no more than 10% of your capital into any one trade. It makes you less prone to losses. Also, set stop losses to protect the downside.
Check Reputation:
Monitor forums to ensure the company you choose to invest in isn’t a pump and dump. Look for insider trades disclosures. When company executives are buying their own stock, this is an excellent sign. Stay away from stocks with unusual bid-ask spreads.
Utilize Limit Orders:
With small cap stocks, use limit orders to control the prices you pay or receive. It minimizes the chances of getting your order filled at a ludicrous price.
Invest in Potential Winners:
When investing in small caps, choose a highly profitable industry. Choosing the right industry keeps you away from the high risks of losses. You should invest in companies that hold high value which will make the chances of earning even high. For example, certain industries are known to rally at particular times of the year like the shipping sector does around November in preparation for holiday shipping.
Learn from Experts:
Apart from the above stated points, it is always advisable to expand your knowledge through reading. You should make an effort in researching and reading about some of the greatest investors in history. John Templeton was one such investor who started his iconic multi-million dollar fortunes by investing in micro cap stock during the Great Depression.