What You Should Know About Small Cap Stocks

Most investors think of the major stock exchanges when trading stocks comes to mind. The New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX) are among those that first come to mind. Often overlooked by the mainstream media, penny stocks are a low ticket security for companies that are valued at under five hundred million dollars and often trade in low volumes. These stocks also trade on 'Over the Counter' exchanges such as the OTCBB or Pink Sheets.

The very fact that small caps trade at such low volumes increases the risks involved in investing in them. The SEC recommends potential investors in small caps to be aware of the fact that the low trading volume of these stocks make it likely that in times of needs buyers will be rare if not impossible to find. Finding accurate quotes for prices is also difficult which increases the possibility of the investor losing his entire investment.

Despite the risks involved, small cap stocks are often attractive investments to investors for various reasons. If you are new to investing and looking for the chance to return a high yield for a relatively low investment you are likely to come across some penny stocks. Its not surprising that speculators are attracted to small caps. A move of a few hundreds of a penny can mean big returns for you. For a $0.10 stock to move up 20% requires a move of only $0.02. If the stock moves to $0.20, you have doubled your money. If the stock starts to move, you can double or triple your money within days. You won't find that kind of return on the major stock exchanges.

On the other hand

There is also a strong potential for fraud with some buyers artificially 'enhancing' or driving the costs by buying large amounts of shares and raising the perceived value of essentially worthless stocks. Most speculators who fall for this lose many when it comes time to sell.

Most financial advisors will suggest not investing more than 10% of your portfolio on penny stocks

It is important to remember that not all of these companies are frauds and many of them have a great deal of potential. Some are new businesses that are working hard towards their goal of earning a spot on the larger exchanges. Do your research in order to decrease your risks of landing with a declining or dishonest company. Often, most investors are often convinced that one good investment can make them a nice tidy profit. While this is true it is better to invest in a company that is showing slow and steady growth than one you are hoping will sky rocket over night. Take the time and do your research rather than gambling with your investment.

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