Cheap small-cap stocks are considered low-cost stocks that do not cost much or yield a significant return. They are cheaper than other stocks in the market. These stocks tend to be less expensive because they are generally newer in the market and carry more risk.
What are small-cap stocks?
Small-cap stocks are shares of small companies with market capitalizations (or “market values”) under $300 million. For this reason, they are also referred to as “small company stocks.” If they have a market value of less than $50 million, they are known as “micro-cap stocks.”
Small-cap stocks can be listed on major exchanges, but many trade only on over-the-counter markets. Marketing through word-of-mouth and “pump and dump” (promoting a specific stock) is common in the small-cap stock market.
Growth of small companies and trading volume
Small-cap stocks should have strong earnings growth and trade near their 52-week highs. If the stocks have not been traded for a year, you may want to leave them for other investors.
It is important to focus on small-cap stocks that provide high trading volume – if they trade more than 100,000 shares in a session, they may be worth exploring.
Small-cap stock prices
Another good rule is to trade only in small-cap stocks that have prices over $0.50 per share. Stocks trading below this price are high-risk and typically involve companies that do not have a clear success track record.
Therefore, you should check the company’s financials before buying a penny stock. If there is documented evidence that the company is profitable and managing its debts well, the chance of losing money on a penny stock purchase is lower. If they haven’t published any financial data, you may want to look elsewhere.
Finding a penny stock
You can find small-cap stocks using brokerage services. Many major brokers offer services for over-the-counter stocks and pink sheet stocks within their trading accounts. For example, TDAmeritrade provides the ability to enter trades on small-cap stocks through its online trading platform.
Once you identify a penny stock that offers a profit opportunity, do not buy it immediately. Monitor the stocks you choose for about a week and watch how they are trading. Look for trading volume and price volatility, and determine the best price to enter before making a purchase.
Small-cap stock promotion and fraud
The small-cap stock market is often used by criminals to raise money from unsuspecting investors. They exploit recent economic trends and natural disasters or other significant events that could impact funds to target individuals seeking to preserve capital or achieve returns.
It is important to note that issuers of small-cap stocks typically do not have the capital to create marketing campaigns with flashy media or endorsements from celebrities or telemarketing. If you are contacted about “good performance,” it is likely that you are being targeted.
If you are reviewing a newsletter about small-cap stocks or a similar publication, be sure to read the disclosure notice that must be included. This is a mandatory inclusion from the Securities and Exchange Commission (SEC).
Small-cap stocks are also known for having “promoters” who present themselves as objective investment experts to “pump” or “talk up” the stock to artificially inflate its price. The keys are to analyze the company’s financial data, its history of profitability, and its ability to pay bills, alongside how it is traded by other investors. These are key indicators that may provide an investment opportunity in a penny stock.
If
If you are unable to find any financial information about a stock or information about the entity that issued the shares or the media, it is best to report to the financial regulatory authority, the security agency, and the regulatory authority in your state and leave those shares alone.
Facts about Small-Cap Stocks
Here are some quick facts about small-cap stocks that may help you decide whether you want to invest in them:
- More small-cap stocks are traded over-the-counter (about 12,000) compared to being traded on major exchanges like NYSE, NASDAQ, and American Stock Exchange.
- Small-cap stocks can also trade on other securities exchanges, particularly in foreign securities markets.
- Typically, small-cap stocks represent companies that are struggling with low cash reserves and do not have a clear path to future success.
- Small-cap stocks can also be defined as securities owned by private companies that are restricted from public trading.
- Small-cap stocks usually do not trade frequently, which makes them less liquid.
- Small-cap stocks are high-risk and are often hard to price accurately.
- The U.S. Securities and Exchange Commission imposes strict rules on trading small-cap stocks, including written disclosures from securities brokers about the relatively higher risks of investing in small-cap stocks.
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Sources:
Investor.gov. “Microcap Stock.”
TDAmeritrade. “Pink Sheet and OTCBB Securities.”
Source: https://www.thebalancemoney.com/can-you-make-money-with-penny-stocks-4156838
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