Learn To Invest Money In Small Cap Stocks And Make Triple Digit Profits (part One)

Everyday, there is a new EBay or Microsoft or Dell company that files for an IPO and that will make the early buyers of its stock very wealthy in several years. The trick is how to find them and invest in them safely. Sure a General Electric or Microsoft could possibly have a bump up in share price in one year of % or % with the release of a phenomenal product or service, but the chances of earning %, %, or even % in one year with large cap companies is quite slim. But its not so with small and micro cap stocks. In fact every month, there will be another micro or small cap stock that nobody has heard of that will make loads of savvy investors rich. So the key is how do you play riskier stocks like this? There are five rules you should always follow. In Part I of this series, Ill review rule number one. Rule Number One: Do your homework. When you find a micro or small cap stock that excites you, make sure you do your homework before making the decision to buy in. Always research the float of a small stock. Why is this important? For a number of reasons. Lets consider this scenario. You research a small stock ABC that you really like. You discover that ABC only has $MM of outstanding shares, a float of $MM because insiders hold the other $MM, and average daily volume for the past three months of $.MM. Well you could be in for a very bumpy ride given the fact that daily volume is averaging % of the float (total amount of shares owned by the public). This discovery alone may make you reconsider buying the stock. Furthermore, if stock ABC has recently had its initial public offering (IPO), then you must absolutely find out when its lock-up period expires. Usually, insiders are restricted from selling off their shares for six months after an IPO. Lets look at our hypothetical stock ABC again, assuming it is now four months after the IPO. Many times, share prices of companies start falling about two months before a lock-up period expires in anticipation of insiders selling off their shares and flooding the market with volume once they legally can do so. If stock ABC is trading relatively flat and there is no added demand right before insiders unload their stock, an overnight doubling of the stocks float is bound to dilute the stock price, and possibly do it very rapidly. Its simply supply and demand at work. There is now twice the supply of stock on the market without any increased demand. However, lets look at the flip side. Lets consider a company XYZ that has $MM of outstanding shares and a float of $MM. Positive news surrounding company XYZ has steadily driven its stock price higher, right up until the point the lock-up period for insiders expires. Lets assume, even though prices have been climbing steadily, that the insiders still decide to cash out and sell off $.MM of their shares immediately. Because this companys float is so small and demand is high, release of additional shares may create a buying frenzy that will drive prices up even more rapidly. So to summarize rule number one, always do your homework and know everything you possibly can about the stock you are buying. As Ive demonstrated, in one situation a small float may hurt a stocks price while in another situation, a small float may tremendously help the stock price. Ill review the remaining four rules in the remaining articles of this series.