A Guide to Trading Penny Stocks and Small Cap Stock Stocks

By: James Brumley

It doesnt matter what you call them micro caps, bulletin board stocks, or even penny stocks. Some traders make a fortune trading them. However, those traders arent necessarily brilliant; theyre just armed with the right information.
Theres no such thing as an investor acquiring too much knowledge for his or here own good, but this five-pronged strategy may be effective just because of its simplicity.
Though not the only piece of the puzzle, traders who want to get the most out of micro caps must first fully understand one key idea trading and investing arent the same thing. Its fine to be both at different times for different reasons. However, traders should also know that one philosophy requires patience, and the other one requires speed. The two approaches dont mix well.
Second, penny stock traders and investors should accept the fact that smaller company stocks are easier to drive higher or lower than large company stocks. In fact, a large institutional player may have the ability to very quickly buy or sell the majority of a small companys float. Traders just need to be prepared to see rapid swings when that happens.
Third, successful penny stock traders focus as much on charts as they do on the stocks perceived value. Sometimes these stocks trade at appropriate values. However, just because theyre undervalued or overvalued doesnt mean theyre going to rally or sink. Reading charts will help time optimal entries and exits of stock picks that are based on fundamentals.
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.
By this point one overarching message should be clear trading micro caps profitably isnt so much a matter of intelligence as it is a matter of discipline and patience. While intelligence cant be learned or taught, everyone has the aptitude for discipline and patience.
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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Editor of the Small Cap Network, James Brumley holds a degree in finance and has dedicated the last 10 years toward helping investors identify undervalued small cap stocks and profitable penny stocks. Investors looking to generate above average investment returns may stand to benefit greatly by becoming a reader of a free newsletter provided by the Small Cap Network.

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