Microcap Investing – Are You Prepared for the Pressure?

Microcap Investing – Are You Prepared for the Pressure?

There’s definitely a “stigma” around microcap investing, mainly because of the various horror stories that are out there from people who have been taken for a serious ride in the markets. You’ll hear advice from many people to avoid micro cap stocks altogether, due to the exorbitant risk that most people claim is latent in these markets. Well, truth be told, there is definitely an element of risk in the microcap markets, but I think that people should be more concerned about their own personal response to the risk in the microcap markets, versus thinking that the stocks themselves are some kind of dangerous thing. The truth of the matter is, the riskiest of investments can be successfully navigated if the investor has a great deal of self-discipline and thorough understanding of the risks involved, including having a proper risk management strategy in place before even initiating a trade of any kind. As Robert Kiyosaki has often said, it’s not really the investment that’s risky, but rather the investor himself/herself is where the risk really lies. Think about it: On one hand, you have mega-successful traders such as John Henry or John Paulson, or the traders mentioned in Jack D. Schwager’s book “Market Wizards” for instance, who have made an extragavantly successful career by trading commodities, but then you have other people (the large majority, I might add) who trade those same markets, and literally crash and burn. Can the difference in success levels be blamed on the markets themselves? Can the guy who bombs out of trading commodities really think that the commodity markets are the problem? Again, there are other traders who extract millions of dollars out of the markets, so it’s not like the markets themselves are “broken” or anything. No, it’s always the investor, NOT the investment, that determines the risk level. Never forget that.

But as to the world of micro cap investing, micro cap stocks definitely fall under the category of “highly leveraged”, because even small swings in price can equal dramatic increases (or decreases) in your trading account balance. You take a microcap stock that trades for just ten cents a share. Think about it: If the stock moves from $0.10 to $0.18, that’s an 80% move to the upside (not factoring in fees or commissions). That’s outstanding, but the flip side to that is the fact that if it moved from $0.10 to $0.02, that’s an 80% move to the downside. Both of these kinds of moves can easily happen when trading micro cap stocks, so you have to be prepared to stomach that kind of volatility, and honestly I’ve seen that kind of volatility happen in microcap stocks within a single trading day. You have to be able to stomach those kinds of price fluctuations without wanting to puke, or losing your head due to emotional attachments to money and so forth. Not everyone can do that, by the way, which is why I truly believe that trading micro cap stocks is not for everyone. We’ll go into the psychology of trading microcap stocks, or small cap stocks, or nano cap stocks, etc. quite a bit in some of the other articles on this site, mainly because I’ve come to realize that it’s not really about what particular micro cap stock you choose, it’s more about your own psychological makeup and risk tolerance that will determine whether or not you’re going to make a successful trade out of it. But again, more on that later. In the meantime, feel free to check out some of the other articles about microcap stock investing on this site.