Micro cap stocks have the get rich quick allure. Even a small gain on a small cap stock can mean making it rich with very little money. Some of the greatest stocks on the market today were once micro cap stocks, including Microsoft (MSFT), Wal-Mart (WMT), and Apple (AAPL). The big question is whether or not micro-cap investment really pays off.
Many micro cap stocks suffer from a wide array of problems, such as insufficient funding, brand recognition issues, no financial reporting, not enough share volume, and many other problems. Since most micro cap stocks are traded on either the Pink Sheets or the OTCBB, and those markets do not regulate company and financial reporting, the information needed to make a good stock pick is often either not present or it is incorrect. Picking the right micro cap stock can be like picking a needle out of a haystack. There is also the risk that the company will go out of business, leaving you with losing all of your money.
The basic premise of playing the stock market is risk versus reward. The best investment moves are made when the risk versus reward is properly balanced. In the micro cap market, the risk is very high, while the reward is also very high. It is estimated that only 10 percent of micro cap stocks make any money, while the rest lose money. To put that into perspective, the average ratio of getting a winning scratch ticket is one in three. The chances of choosing a winning micro cap stock are only one in ten. Since the odds are against making any money from a micro cap stock, it is wise not to base your investment portfolio on these stocks.
Any micro cap stock investment should be treated as a gamble and you should be willing to accept that all of the invested money may be lost entirely. The key to investing in micro cap stocks is to choose stocks that have a large trading volume so that you can sell the stocks. It is important to invest in companies that properly report their financial information so that you can make an educated stock pick. Choose a stock that also has proven itself to be reliable. A micro cap stock should be on the market for at least one year before considering it as a stock pick. The stock should not be unstable. The charts for the stock should not bounce all over the place wildly. By using these tips, you can improve your chances of making a good stock pick.
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