0.0001 Stocks: A Double-Edged Sword

0.0001 Stocks

Much ado has been made in forums and online stock trading message boards about 0.0001 stocks, and everyone seems to think that these kinds of stocks are the “sexiest of all” to trade. There’s definitely a stigma that comes with these nano cap stocks, and you can tell it by reading some peoples’ forum posts and so forth…they think that they’ve hit a pot of gold sometimes because they’ve found a stock that trades at $0.0001. Not trying to bust anyone’s bubble here, but just because you’ve found a stock trading at that level does not mean that it will be easy to trade it and exit with a profit. Although 0.0001 stocks are definitely all the rage right now, liquidity can be a factor, and many times traders lose out on profits because they have no idea how truly difficult it can be at times to enter and exit these kinds of stocks. You have to realize that when you’re talking about stocks at the “sub penny” level, it literally means that the stock trades for hundredths of a penny. In other words, in the case of a stock trading at $0.0001, you could buy 10,000 shares for literally one dollar. That’s right, one measly dollar. Although a million-share order sounds impressive, for a nano cap stock trading at $0.0001, that would only cost you a hundred bucks. So you see, even if the stock is trading at an average daily volume of 100 million shares, we’re only talking about $10,000 worth of transactions there. So, this opens the door wide for market manipulation in most of these kinds of stocks. What this means is that the stock can be illiquid, or the share price can be “bullied around” by people with relatively deep pockets, to the point where you can have an open order to buy or sell the stock at the prevailing market price, but get filled at some off-the-wall price that’s far higher (if you’re buying) or far lower (if you’re selling) than what you thought. This is called “slippage”, and it happens quite a bit in the sub penny stock arena. This is why I always recommend that you only use limit orders when purchasing micro cap stocks of any kind. If you’re a patient person, this will work out fine, but if you’re not, your eagerness to be in the markets will be your ruin.

0.0001 Stocks and Leverage

One thing that should be taken into consideration before you buy any stock at $0.0001 (or any price in that “nano cap” range) is that these stocks contain fantastic leverage without having to have dramatic price moves. What do I mean? Well, just think about it: If a stock trading at $0.0001 moves in price by ONE TICK to $0.0002, that’s literally DOUBLE the stock’s former price. So, if you bought the stock when it was at $0.0001 and sold it at $0.0002 (not as easy as it sounds), you would have literally doubled your money just that quick. To put it another way, a move from $0.0001 to $0.0002 is a 100% move. And if the stock were to move to $0.0003, that’s a 200% move. As Ron Burgundy once said, “Knights of Columbus!!! – that’s some serious stuff. This magnified price potential is known as leverage. And leverage is cool as long as it’s working in your favor, but not so much when you’re on the other side of it. Let’s say that you place an order to get into a stock for no higher than $0.0002 per share, and you get filled at $0.0002. For argument’s sake, let’s say that you bought 2.5 million shares ($500 worth) at $0.0002 and you’re feeling pretty good about it. After all, hey, if the stock ticks up to $0.0003 and you can exit at $0.0003, we’re talking about a 50% increase in price, which would be an extra $250 added to your trading account in what would seem like the blink of an eye. But, if the stock declines to $0.0001 (just as likely), you have lost $250, which means your investment capital has just been cut in half. So leverage works both ways, and if you’re not mentally and emotionally ready to handle those kinds of price fluctuations, you might want to stay on the sidelines in the micro cap trading arena. And that’s not necessarily a bad thing; it’s just a matter of understanding your personal tolerance for risk, and being willing to accept it like a big boy (or girl) if you lose all of your investment. Take it on the chin and consider it the market’s way of taking “tuition money” from you for your trading education. Honestly, there’s no such thing as a good trader who has never had a losing trade, so please make sure that you’re ready to handle the risk before you put the trade on.

Where to Find $0.0001 Stocks

For the most part, $0.0001 stocks usually trade on the Over the Counter Bulletin Board Exchange (OTCBB). The OTCBB is considered by some to be the “anything goes” segment of the stock market world, and for the most part that’s true due to the lack of stringent regulatory measures for this particular exchange. In other words, you don’t really have to do a whole lot to get your company listed on the OTCBB. While this can mean a more “liberal” trading environment, it can also open the door wide for fraudulent companies and market manipulation. What people fail to realize is that fraud and stock price manipulation exist at EVERY level (Enron, anyone?), so in reality you’re not necessarily “safer” if you only trade stocks that are listed on the “big boy” exchanges. At the same time, everyone who desires to participate in trading 0.0001 stocks or any other nano cap price level stock should recognize that this arena of investing is for the gamers among us, people that are more comfortable with taking bigger risks. Nobody gets into nano cap stocks thinking “buy and hold”—well, you shouldn’t anyway.

I hope this has given you some more clarity and insight regarding the leverage that is inherent in $0.0001 stocks. Lord knows this article was long enough (LOL). As always, feel free to check out my other micro cap investing articles on the “Articles” page.