Micro cap stocks are a completely different breed than large cap stocks, and require a completely different strategy for investing. There is more risk associated with investing in micro cap stocks (we will discuss how you can limit that risk significantly in a few minutes) but there is also MUCH greater potential for huge gains in the micro cap markets than in any of the “big” markets.
Large cap stocks are lucky to have gains of 5-8% in a single day, and even averaging 10% growth a year is considered a ‘solid’ investment. Micro cap stocks however, can easily gain 25%+ in a single day, and some jump HUNDREDS of percent on merely a positive announcement! (I.E. Strong Financials, Approval of Funds, New Developments…etc)
It’s a lot easier for a stock to jump from 3 cents to 9 cents (a 300% gain) than it is for a stock to go from 30 dollars to 90 dollars. (An equal percentage) Remember that a $10,000 investment in a 3 cent stock that jumps to 9 cents will earn you the same profit as a 30 dollar stock that jumps to 90 dollars.
These big percentage gains are MUCH more common in micro cap stocks than they are in the “big” index stocks, and most importantly they can happen in days and weeks, rather than years! This is why there is SO much opportunity in the micro cap sector. These kinds of gains are a daily occurrence if you know to pick winners! (We’ll explain how to find these winners later.) So what makes a micro cap stock rise in value so rapidly? There are a couple of factors.
The first is due to a positive news announcement regarding a company. This can come in the form of positive financial news, a new development, a breakthrough product, a contract landed…etc. Let’s look at an example of this. Let’s say a small energy drink lands a contract with Starbucks to start selling their product at 1000 Starbucks locations across the country.
Obviously investors will be lining up around the block to start buying shares in this company. Granted, this would be a pretty major announcement, but even something as simple as positive financials can cause these stocks to soar. However (and this is the key) many times positive news announcements do not affect a company’s share price either positively or negatively.
Why? The primary reason is LOW INVESTOR AWARENESS. Micro cap companies that do not contract investor relations firms have a hard time selling shares of their stock, simply because VERY FEW INVESTORS EVEN KNOW ABOUT THE COMPANY! This is why a company can have a very positive announcement, and have the share prices go unaffected.