April 22, 2008
Cvx Stock Quote
Want to know what buying strategies to use when buying stocks that can potentially return triple digit gains? In part one of this series, I told you what factors you must consider when buying a small or micro-cap stock. In part two, I’ll review intelligent buying strategies when it comes to buying small caps.
Rule Number Two: Remove emotions from your buying decisions with a disciplined strategy.
Ok, so let’s assume that you’ve done your homework now and discovered a company that you believe will run up at least 60% or higher over the next year. Decide on a predetermined buying price and do not waver from this price. Period. End of discussion.
Why?
Ok, let’s take a look at hypothetical stock YYY. Company YYY is the industry’s leading innovator in a huge growth industry that has seen the biggest growth spurts in history for the last three trailing quarters, yet the general public still does not know about them. In addition, they have patented technology that lets them protect their first mover advantage and high entry costs into the industry gives them nice barriers to entry. On top of all of this, Company YYY is trading at a ridiculously low P/E and a ridiculously low price of $3. In fact, its price would have to appreciate 200% just to equal the P/Es of the giants in the field. You study YYY’s historical price chart and see some volatility, so you decide you will wait until the price drops to $2.80 to get in. But in the two days you wait for company YYY’s stock to drop in price, it unexpectedly shoots up to $5.50. Or perhaps it plummets way below your $2.80 buy in price to $2.00. On no new significant news.
Depending on what scenario happens, you may be thinking “I’m so dumb not to have bought at $3. I guess I’m just going to have to bite the bullet and dive in at $5.50,” or “This is so great. I wanted to get in at $2.80. Now it’s so much cheaper at $2.00 that I’m definitely going to buy now.”
Right? Wrong.
Stick to your original plan. If you throw your buying strategy in the trash and decide to get in at $5.50, you’re letting emotions drive your decisions instead of logic. If you were only willing to pay $3, why would you possibly be willing to pay 83% more for the same stock just 48 hours later? And if we consider the second scenario where the stock plummets to $2 a share, don’t you think that this merits more caution instead of haste? Remember, in both hypothetical situations, we are assuming there is “no new significant news” surrounding stock YYY to justify these huge price movements. Under these assumptions, the volatility of the stock is probably occurring because of jumpy day traders taking profits off the board or dumping shares.
But let’s take a closer look at why letting emotions creep into your decisions is a bad idea. Let’s look at the situation again where stock YYY blew through your designated buy in price of $2.80 and went to $5.00 in two days. Let’s assume you stick to your guns, wait two weeks, and buy-in when YYY stock finally dips to $2.80. Now employing a stop loss of 15% against your buy-in price, your sell-out price of the stock is $2.38 versus $4.68 if you had bought the stock when it spiked up to $5.50. This huge gap in stop-loss price points may very well be the difference between holding on to the stock and earning 80% gains versus selling out 48 hours later and feeling confused as to whether or not you should buy back in.
To summarize, never throw out a pre-designated buying price for a risky stock due to unexpected price spikes. If this happens, stick to your original buying strategy if you still believe in the stock and wait until volatility decreases before you buy at your pre-designated buy-in price.
Remember, there are literally hundreds of stocks every year that make rapid double or triple digit gains. If it turns out that you missed out on one opportunity because the stock soared right through your buy in price and kept soaring higher or the stock’s price took a sudden plunge, know that there are hundreds of other opportunities waiting to be discovered. If the stock you loved so much never returns to your buy-in price, move on. You’ll find a better stock to buy soon enough.
? 2006 Global Market Opportunities
About the Author
John Kim is the founder of Global Market Opportunities. He has over thirteen years of experience in finance and financial services with two Fortune 500 companies. To learn how to discover small and micro cap stocks that consistently and significantly beat the market indices, click the link, Learn to Invest Money and Achieve Financial Freedom
Over The Counter Bulletin Board stocks (OTCBB) and the Pink Sheets are the two types of penny stocks you will encounter. The main difference between the two is that OTCBB stocks are required to file with the SEC and the pink sheet stocks are not. Some traders refuse to trade pink sheets because of this, those traders are missing out on some great opportunities. Even Warren Buffet has been known to look for undervalued companies in these markets.
Beware, trading in the OTCBB and Pink Sheets is not for everyone. Often the stocks are illiquid and have a large spread between bid and ask. There are also a lot of companies that are completely worthless and will try and masquerade as great companies while diluting their shares. Another worry about these stocks is the fraud involved or “pump and dump” schemes where traders or company insiders have their stock “talked up” on bulletin boards or in chat rooms. The posters make unrealistic statements about where the company and the price per share are going, while selling you their shares. The price per share then plummets. You can avoid most of these problems with due diligence on your part. Take the time to read filings, call the company and investigate thoroughly. This investigation should take place with OTCBB stocks and Pink Sheets. Do not expect to find everything you need to know in the filings.
After you find a stock that you wish to purchase, you pull up the price and find that there is a 30% difference between the “bid” and “ask” price. The bid being what a trader is willing to buy a stock for and the ask what a trader will sell the stock for. Finding spreads of 30% or more is very common in these markets. If the stock is thinly traded with a big spread, you will want to buy on the bid, or a small fraction above the bid. If the stock is moving fast because of news or an announcement, you will probably be forced to buy at the ask. When you place your order to buy on the bid or slightly above, it may take a long time to get filled. You may never get filled. At these times patience is a virtue. You may also want to try buying shares somewhere between the bid and ask.
If you have done your homework well and the company announces great news, such as winning a high paying contract with IBM, the stock will then take off, gaining 100% or more before others can even call their broker to buy shares. This is the reason for investing in these markets.
I do not recommend that you place all of your money in such a “High Risk, High Reward” market, but spend some time investigating penny stocks and you may be rewarded greatly. Remember: exercising due diligence is important for all investment decisions in any market.
About the Author
About the author: Keith Guyette M.Ed, J.D. is a professional trader as well as the owner and head stock analyst for www.bottompicks.com. Mr. Guyette is also the moderator at one of the largest stock bulletin boards on the web.
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