The Secret to 100 Percent Returns


Today's stock market is not like the market of the good old days. In the 1990s, you would put your money in the market and just watch it grow. Not so any longer. Over the last ten years, the S&P 500 has actually lost ground. Check out the grey line and right scale in chart below.

Thankfully, small cap stocks have actually risen (see green line and left scale in chart below) over the last 10-years, so investors with exposure to this asset class have been able to generate some nice returns.

In today's market, investors have to fight for every percent and use the appropriate buy or sell order to make sure they get the price they want on shares. Properly timing your stock purchases will help you to eke out extra gains, and protect against losses as well.

Here are a few techniques to help get you started:

1. Market order. The standard, default stock order is called a market order. This simply means that your trade will be executed at the current market price. Market orders are generally executed immediately at the best price offered by a market maker, a firm that is quoting a buy a sell price for stock.

For small caps with low volatility, the market order is an easy one to place. However, with more volatile stocks, you might get some unexpected surprises upon execution. Use market orders if you must buy or sell a stock immediately and the execution of the trade is more important to you than the price of the transaction, but in all other cases use a limit order (see below).

2. Limit orders. When you place a limit order, you state the exact price at which you want to make a purchase or sale. The order will only be placed if that price is available. This is a smart way to buy and sell small caps, because you set and control the price; if the market price varies from your requested price the buy or sell order will not go through. Limit orders are essentially the only way I place an order. However, limit orders are not effective if you want to make the trade immediately , since the trade may not be executed.

3. Stop loss. As the name suggests, the stop-loss order is used to limit losses. This order includes a price trigger that generates a sell if the stock falls to a specified price level. When shares fall to the prescribed price, a market order to sell the stock is executed.

With small caps, you must be careful, as market volatility could "stop out" a position based on intra-day volatility. Therefore, use these cautiously, and set them at a price at which you'll definitely want to sell the stock. For hands-on investors watching the market, stop losses are less useful, since you're always watching your positions.

A variation on the stop loss that I use is a 'manual' stop loss. This means I'll only place an order to sell the position if the closing price at the end of the day is below my stop loss price. In this event, I'll sell the next trading day. This method means my stock can fall below my stop but if it rallies in the afternoon I'll hold it. This actually happens more often than you'd think - provided your initial stop loss is set at a good price.

When you're ready to jump on a stock there are three main types of analysis I like to do:

1. Review fundamentals. Don't expect to draw a conclusion about a company as if it were locked at one point in time. Everything changes. Just think of the company where you work - surely things were different a year ago, and there are plans to change things in the coming year. This is especially true with small caps, where growth trends can be fast. It is critical that you monitor the fundamentals in the companies you invest in for potential game-changing developments.

2. Follow financial trends and look for leveling-out of those trends. Every trend levels out at some point, even the ones we wish could go on forever. Be on the lookout for subtle changes in revenue, earnings, and the other trends you monitor. You want to make your buy and sell decisions before the change becomes obvious to everyone else.

3. Track moving averages and identify buy and sell signals. The use of moving averages is probably the strongest of the technical tools you can use. The averages offset short-term price volatility and show you what is likely to occur in the coming weeks or months. Changes in the moving averages can improve your timing of buy and sell decisions and should be watched closely.

***Doing the above has helped Tyler Laundon (lead research analyst) and me recommend 7 stocks in a row for our Small Cap Investor PRO service that have all risen more than 20 percent since our recommendation date. Our average gain as of Friday on these positions is 46 percent, with an average holding period of 100 days.

We're not trying to make it too complicated, or trying to perfectly time every investment. We're simply focused on finding companies that are growing revenues and earnings, are selling at a discount to their fair value, and are being careful with our entry points.

You can do the same thing if you follow the tips I outlined above. Naturally, a rising stock market helps. But as the first chart I included shows, exposure to small cap stocks over the long-term has been proven to be a successful strategy.

Editor's Note : Why do the Biggest Gains ALWAYS Come from Small Cap Stocks ? Follow the link to find out why, and learn more about the strategy we use to find small cap stocks, like two that have risen 99 percent and 89 percent since our recommendation date.

Further Reading : A 'hidden' sector of the market that has been soaring lately is silver. I recently put together a Special Report: Sierra Madre Silver Profits that features three silver mining companies, all in different stages of development. With silver rising above $27 an ounce, these stocks are great buys right now. Get your copy of this special opportunity silver report here, and learn why two of our silver stocks are up 99 percent and 22 percent right now.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Stocks

Referenced Stocks:

Wyatt Investment Research

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