Nano Cap Stocks and the Traders Who Love Them
Nano Cap Stocks and the Traders Who Love Them
Much has been written about the dangers and/or benefits of nano cap stocks, and I believe that this particular category of investment instruments is probably one of the least understood of all. For anyone who may not yet be familiar with the term “nano cap” stocks, these stocks are the ones that usually trade well below one penny per share, and in many instances these stocks are actually worth fractions of a penny per share. A sample stock price quote of a nano cap stock may be something like “$0.0001”, which means it would take one-hundred of those shares to equal one penny. The first thought that may come to someone’s mind when they hear something like that is “Why the heck would I want to own something that’s worth that little?” Folks, this is where we have to get really honest and call things what they are: You don’t buy a nano cap stock because you actually think it’s going to ever attain “blue chip” status—as a matter of fact, in all likelihood, a stock trading at $0.0001 will probably never see a share price that’s literally 100,000 times greater than what it currently is (which, by the way, would only make the stock worth $10.00 per share). That’s simply not going to happen. So it’s not like people who buy nano cap stocks are doing it for some type of value play a la Warren Buffett. Nope, the magic word that can explain why people buy nano cap stocks is LEVERAGE. Yup…for the most part, the dollar value of volume in these markets is relatively tiny, although millions of shares of nano cap stocks are traded every day. The “secret sauce” behind these types of stocks is the fact that you can achieve some butt-kicking leverage if the trade goes your way.
Nano Cap Stocks = Insane Leverage
Let’s take a nano cap stock trading at $0.0002 for example. If the stock moves up just ONE UPTICK—that’s a 0.0001 move to the upside—the stock will now be worth $0.0003, which represents a 50% move from $0.0002. Just like that. This type of thing happens all the time in the nano cap “nanoverse” (hey, I think I just coined a new word). So if you are a fortunate soul that can enter a position in a nano cap stock and see it go up by a couple of these ticks, you could very easily make double, triple, even quadruple your money invested if the stock has any kind of significant upswing in price. Now I don’t want to keep you in dreamland without adding a dose of reality here—liquidity is oftentimes an issue with these types of stocks. They trade on the OTCBB for the most part, and believe me when I say, liquidity can be very elusive on that particular exchange. I’ve had situations where I did get in at $0.0002, and the stock would tick up to $0.0003 or whatever, I’m showing open profits in my trading account, but when I would try to exit on the fly, I couldn’t find any buyers at $0.0003, even if the stock hung around that price for a while. Why? Sometimes the market has to trade through your price (i.e., $0.0004 in this case) for you to get the “next price down” filled. What you DON’T want to do is exit with a market order—that’s virtual suicide in the OTCBB markets especially. Use limit orders ONLY when trading OTCBB stocks—just trust me on that. Have your price objective in mind, set your limit order, and don’t bend your rules for anything. Otherwise, you’ll be giving a market maker a free lunch with your market order. Another thing to keep in mind is that you have to be patient, even though these markets are fast-paced. You may have to wait a few days for a move to happen…wow, that sounds so funny. Back in the older days, you would have to wait YEARS for a stock to move, but with nano cap stocks, significant percentage moves can happen in one day.
Nano Cap Stocks and Risk
I would be remiss if I didn’t mention the fact that you better be ready to lose it all when you speculate in the arena of nano cap stocks—really, this applies to all areas of micro cap investing. This is not a game where safety and security will be number-one. Nope, this is more along the lines of high-risk, high-reward speculation, and if you’re not ready to kiss that money goodbye in a heartbeat, don’t trade these markets. For heaven’s sake, don’t trade with your mortgage money or your car payment money. It truly has to be money that you can afford to lose. There are absolutely no guarantees with nano cap stock trading, so you really have to have the internal risk tolerance to handle it. You have to know what you’re getting into before you pull the trigger. You have to be just as willing to set that money on fire as you would be to trade nano cap stocks with it.
These are just some of my thoughts and info on nano cap stocks—feel free to check out my other articles on micro cap investing for some more cheap entertainment (LOL).
