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Targeting Volatile Small Caps

25 May 2008 No Comment

The following article is a guest post from 20s Money reader, Daniel from University of Georgia.  Thanks Daniel for the great information.

As an active investor in my 20s, I am interested in finding stocks with high growth potential that can add wealth to my slower moving, safer, “pillar” stocks. I see the current bear market as an opportunity to buy stocks at below-average prices. As a college student I do not have a lot of money to invest, so small cap stocks interest me due to their generally low prices and high growth potential. I search for stocks with very large gaps between their below average 52-Week performances and their strong 13-Week performances. These stocks will tend to trade well below their average prices yet with recent, strong 13-week performances, they are generally gaining value. Small cap stocks can be excellent long-term investments but this article will concentrate on gaining from very short-term positions with extremely volatile stocks.

A few days ago I was searching different industry sectors for small cap stocks on the move. I stumbled across a few companies making abnormally high gains and decided to watch these stocks closely. In a single week a few of my watched picks hit 200+% gains. What I had found was the domestic oil companies’ stock spike of last week just before the news and analysts found the trend. While watching these prices surge and then quickly fall within a single week, I obtained substantial knowledge on small cap stocks with great short term potential.

An upward trend in price is not enough to justify a purchase and further research should always be done on the company. If a company appears to be worth your investment you must generally act quickly on these fast-moving stocks. Remember, a few of the domestic oil stocks only increased sharply for about three days such as Fieldpoint Petroleum (FPP). Locking in gains with these volatile stocks requires close monitoring and a tight “Stop-Loss” can add an extra barrier of safety. I suggest using a “Trailing Stop-Loss” on these volatile positions due to its ability to move up with the increases in price. The goal on these short holdings is to gain equity in a very short period of time and then quickly sell off when the trend appears to be reversing. If there does not appear to be any significant news backing the climb in prices, be extremely careful of the time frame in which you hold the position. If the trend appears to be slowing, be weary of acquiring the position. These intensely strong gains do not generally last very long and you may have already missed the opportunity.

In summary, be VERY careful with these extremely volatile stocks. Use performance figures to find stocks trading well below the average price and concentrate on the ones that have strong recent performances. Do not just buy on a whim. Research the company and its financials. Get in quick and use “Trailing Stop-Losses” following at small percentages to lock in gains. In general, the higher the percentage of the daily gain, the shorter the trend will last. Remember, it is rare for a stock to double or triple its price every few days so do not be afraid to pull out early and take the profits! Good luck and happy investing!

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