It never hurts to think big about small stocks.
The allure of such stocks is a simple one – they don’t cost as much, as say Alphabet. And if you can spot the right opportunity, like ACADIA Pharmaceuticals (ACAD) at less than $2, you stand to make a substantial amount of money.
If you bought ACAD at 96 cents in 2011 for example, you made 5,213% in a few years.
If at the same time, you bought Alphabet Inc. (GOOG), you made a small fraction of that.
Granted, spotting the right opportunity can be a tricky one. But it can and has been done.
Here are some of the best tips we can offer.
Tip No. 1 – Focus on a Small Cap Stock with a Catalyst
For example, small cap marijuana stocks had a major story with further U.S. state approval, Canadian legalization, and corporate interest. Constellation Brands invested $4 billion in Canopy Growth – a sizable catalyst and story. If you buy a small cap stock with no story or near-term catalyst, you may want to consider spotting another opportunity.
Tip No. 2 – Only Trade Liquid Stocks
Only consider trading small cap stocks that have volume of at least 100,000 shares a day. If you trade low volume, illiquid stocks, you may have a tough time getting out of the position.
Tip No. 3 – Buy on Earnings Growth
Sometimes, even the most boring stocks have a growth story to tell. If you can spot it, you may have found quite an opportunity.
Look at EnviroStar (EVI) for example.
The company distributes commercial, industrial and vended laundry and dry cleaning equipment and steam and hot water boilers through the United States.
It’s not the most exciting company in the world. But fundamentally, it was.
In early 2013, this small, boring company began reporting that that quarterly revenue had just soared 29.4% to $6.44 million year over year. Net income had skyrocketed 713% to $125,155, or two cents a share from $15,396 year over year. In short, this company was no stranger to growth.
Better yet, it traded at just $1.60 a share at the time. That’s cheap for a company with a great earnings story. Over the years, interest grew, as did quarterly revenue and net income. It’s now a $36 stock, which was quite rewarding for smart investors that found the earnings story.
Tip No. 4 – Money Management is Key
Stop losses are an essential part of trading any stock out there. Have one in place, or you risk losing everything when you don’t have to.
This is an imperative. You must manage your money well, or you can lose it all. Trading without a plan is as good as an idea as driving blind. Money management defines your risk. How much are you willing to risk per trade?
It also gives you a way to set aside a set dollar figure per trade each and every time. We don’t know if any next trade will be a winner or a loser. Why bet the farm when you can’t afford to lose the farm?
A trader with no plan for action has already lost.
Do you know when to exit on an up or down move? What stop losses or trailing stop losses do you have in place? Know these things, and set a plan so you won’t run into “crash and burn” scenarios as often as those with no plan.
Pros know when to just walk away from a trade. Remember, stocks don’t just move up. They also come down.
Lower expectations. Inexperienced traders expect to quit their day job and make a fast-paced, hot lifestyle out of trading. That’s not going to happen. No one ever became a brain surgeon or rocket scientist first year in. The same applies to trading. If you make a mistake, learn from it.
Remove all emotion from your trading. That doesn’t mean you have to have ice flowing through your veins. It simply means you need to re-think your strategy. No matter what your emotion says, never allow emotion to dictate your trading action.
Never wait to take profits… If you have good profits in hand, take them. Exit half of the position and let the other half run. But don’t leave profits on the table for too long…
Here’s the number one rule to trading.
Never risk money you cannot afford to lose. Don’t do it. Don’t be that person, the fool that thinks Wall Street is a get rich quick slot machine that does nothing but spit of winnings.
Traders have this tendency to risk it all, thinking they can do no wrong for a big payout. Don’t get greedy. If you can’t afford to lose $5,000 in a single trade, then why are you doing it?
The market is not a sure thing.