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
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
Here are a few techniques to help get you started:
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).
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
, since the trade may not be executed.
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:
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.
Follow financial trends and look for leveling-out of those
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
the change becomes obvious to everyone else.
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
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
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.
: Why do
the Biggest Gains ALWAYS Come from Small Cap
? 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.
: 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