Success in small cap & micro cap stock trading like with any other business in life comes from being able to see the big picture and from paying attention to the small details.

Let’s say for example that you are a business owner and you have a jewelry store on a given street just like the guy in the other corner does, but still the other guy is making 5 times more profits than you are only because he’s doing something different. He knows something that you still don’t and that’s what makes him more profitable.

The funny thing about this kind of situation is that you could be just a small distance away from being as successful as he is.

We know that day trading small cap stocks with momentum is not the only way to make money in the stock market. But it can be the fastest way when you do it right.

We also understand that a lot of people shy away from short term momentum trading and think that only a few traders can profit from it. It’s true. Only those short term traders with proven knowledge have the ability to profit consistently when stocks go up or down.

You don’t necessarily have to trade small cap stocks with positive or negative momentum all the time. But you can learn how to take advantage of them when you encounter with the best opportunities and at the same time limit your risk.

Visit us today at Profit From Penny Stocks http://www.ProfitFromPennyStocks.com and learn more on how to pick small cap & micro cap stocks stocks that you can short or ride all the way up on momentum every week.

ProfitFromPennyStocks.com helps beginner traders and investors take advantage of small cap and micro cap stocks in a simple way.

When an individual investor wants to roll up his sleeves and do some research in the pursuit of the next big winner in the stock market, the place many start is in the small cap sector.

As with the other capitulation sizes (capitalization is a stock’s market value), no one can completely agree on a precise definition, but corporations under $2 billion are often considered small caps. It should be pointed out that there are two asset classes below small caps. Micro caps are companies between $50- 300 million and Nano caps are below $50 million. To further confuse the issue, there are also "penny stocks" that really have nothing to do with capitalization size, but are stocks that trade very cheaply.

Life begins for many small caps as an Initial Public Offering (IPO) or as a "spin off" from a larger company. Like Toddlers, these companies are often still in their developmental stage. At this point they exhibit characteristics that give them the potential for both massive growth and extreme downside volatility.

Their huge growth potential is obviously the piece that attracts most investors. Who wouldn’t have wanted to get in on a Microsoft in its early days of trading? The question of course is who knew about Microsoft back then?

Often, it is individuals not institutions that first get in on the ground floor. Analysts working for major brokerage firms usually don’t have the time to develop coverage on small companies and institutional investors generally have limitations of how much they can own of a single company. Although a $100 million may seem a lot to an individual, it’s a drop in the bucket for the big players and equals 20% of a $500 million company. The 20% far exceeds what the SEC stipulates a mutual fund can own and often exceeds the investment policy statement of an institutional investor.

The disadvantage here to the investor is there is relatively little published research that the individual can rely on in the decision making process. But the good news is that the individual investor has the opportunity to buy the stock before the institutions get in and run the price up.

Many investors believe in the "efficiency" of the market. This means that with all the information out on a particular stock, the market can "efficiently price" any stock. In the case of small caps (where information is often lacking), an argument can be made that there is some potential to profit from inefficiencies in the market. Again, this cuts two ways. Many investors can remember that it wasn’t too long ago that many small cap techs sold for vastly inflated prices only to watch a steep price slide as the market started to correct these inefficiencies.

Income investors should probably look elsewhere. Small caps generally conserve whatever cash they earn for growth potential. Any yield is usually incidental to their objective.

For mutual fund investors, small caps can be an interesting proposition. Certainly, mutual funds can help offset some volatility through diversification. However, for investors that want to follow a small cap’s ascension to the large cap sector, mutual funds may disappoint. Often, to avoid what’s called "style drift" a mutual fund manager sells a successful position simply because it has outgrown its capitalization value. While this may be helpful for asset allocation purposes, it’s not appealing for investors wanting to watch a company "grow up".

Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also reach him by going to the Living Trust Network web page located at http://www.livingtrustnetwork.com.

Copyright 2005. LivingTrustNetwork, LLC. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the written consent of the Living Trust Network, LLC.

Let’s take the NASDAQ composite. It is made up of a basket of shares, the largest and most well traded stocks and an average of these stocks figures go into making the NASDAQ composite. Remember that word "average."

As with ANY average you will always have shares outperforming and under performing the average. Do a research . Now with all the doom and gloom about how low these markets are heading.

How it is impossible to make money as a bull in this market would you be surprised by these numbers?

26 stocks in the markets have made over a 200% return this year! 7 of these stocks have gone on to make over a 500% return this year! 3 of these stocks have gone on to make over a 1000% return this year!I have had some huge success with stocks such as:

MOVI +84%

ALLY +67%

THQ +59%

So it’s not all doom and gloom.

When the market averages turn sour - You now have to trade the small cap momentum stocks!

Didn’t CNN say this is a bear market and there was no money to be made by the bulls? Well seems like someone is wrong.

Bottom line: Market conditions are tough. The big cap stocks are falling far and hard. Mutual funds are losing buckets full of public money. The public are switching off the stock market in their droves as those market darlings they held last year are sinking lower and lower. But you are doing the wrong thing. Completely the wrong thing!

In a run away bull market you want to be INVESTING in the

BIG CAP Momentum stocks. There simply is no better or easier way to make a lot of money.

But when the market averages turn sour you have to change your strategy. You now have to trade the small cap momentum stocks! his is where the money is being made now. The last thing you want to do now is leave your hard earned money invested in Yahoo, SUNW, QComm in the hope they’ll bounce back.

It won’t happen in our lifetime. Yahoo and a host of other high flying stocks in the 2000 bull market have had their day in the sun. It will not be repeated! Their bubble burst a long time ago. If you can’t stomach the stock market any-more then get out!

If you are willing to give it another shot with a slightly different approach then order MSTS now and start trading in those small cap momentum stocks. This is where the money is!

How long can the market keep heading lower? Well I hate to keep repeating myself but the fact is noone knows. Some bear markets in the past have lasted over five years. Does it look as if the markets can head higher from here? Do general conditions warrant a new bull market cycle? I see absolutely no sign of that.

Keep your ears closed and trade what you see. Right now I see lower markets ahead. Keep out of the large cap stocks.

Get your Momentum Stock Trading System and sign up for my free weekly online trading system newsletter here at: http://www.stressfreetrading.com

To be honest, it doesn’t matter what type of stocks we invest in. Common stock with small capitalization (defined as having market capitalization of $ 500 Million or less) and big capitalization (market capitalization of $ 5 Billion or more) can give you outsized returns provided that you bought it under fair value. But if you were only given one choice, which one would you prefer?

Small cap common stock historically returned a higher rate of return than its big cap counterpart. All household names that you are familiar with were a small cap stock. Microsoft, Dell, IBM, Johnson & Johnson were all small companies. When a company is small, a few millions of additional sales may contribute to explosive growth in earning. Therefore, the reward of investing in small cap stock is high. How about the risk? The risk is plenty. 90% of all new business will fail during the first five years of operation. The statistic for the number of small cap public companies that fail are not widely available. But, my guess is it may involve about half of the publicly traded companies.

Big cap stock is a bigger and steadier companies. For some, bringing in one billion dollar of sales may not move the profit meter. Therefore, earning growth has slowed and the potential return is lower than small cap investing. The risk in investing in big cap stocks however is low. Sure, some companies fail from time to time. Polaroid, Enron and Worldcom came to mind. But for most occasion, big cap stocks can turn the ship around when they are in trouble. The phrase ‘they are too big to fail’ comes to mind. IBM, Altria, Bestbuy, General Electric, Walmart, Chevron have its ups and downs. All of them recover. Some of them were acquired later on. Therefore, the risk of failing is lower with these companies. Perhaps, it is as low as 10 - 20 %.

Now, it is your decision time. Which one do you prefer? I am more comfortable in investing in big cap stock. I still had plenty of investing time but big cap stock helps me sleep better. It matters more to me than higher potential return. The best solution of course is to mix your portfolio with both big cap and small cap common stocks. However, do not over diversify to the point where your return will be mediocre no matter what your stock prices do.

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Ever hear of no risk, no reward? Well, buying riskier small cap stocks that could return triple digit gains doesn’t have to be a risky proposition. In the first three articles of this small and micro cap series, the first four rules focused on buying strategies. In this last article, the last and fifth rule will cover selling strategies.

Rule Number Five: Remove emotions from your decisions with disciplined selling strategies.

So now that we’ve covered how to buy in to such stocks, let’s review selling strategies because they are just as important. With selling, always limit your downside with stop losses of 10%-15% in long positions and stop losses of 25% with options. Using this strategy eliminates much of the risk from attempting to capitalize on double digit and triple digit gains. In fact, once you become good at identifying opportunities, having winning pick percentages of 70%-85% would not be unusual. And if you attain these percentages, the 15% of picks you lose several hundred dollars in becomes irrelevant when offset by your huge gains. In reviewing what to do about gains, just abide by one rule.

Don’t get greedy and always lock in gains.

If you don’t get greedy, there is no way you should not make money from a stock that has experienced explosive growth. But this scenario does happen. And only one thing causes this to happen. Greed. People will watch 100% profits turn into 20% losses because of greed.

Just as you did with your buy in price, have a predetermined selling price. As opposed to the buy in price range, I would choose a more specific price. For example, let’s consider stock YYY again and assume you bought the stock for $3 a share. Say you set your goal at $5 a share, a 67% increase, but that it blows right through that price two weeks later.

Now what do you do? Hold on or sell?

With sell strategies of rapidly rising stocks, the picture becomes slightly murkier than with sell strategies of stocks that are falling. When a stock passes through your 15% stop loss order (see part I of this article), it will sell automatically, no questions asked, with all emotions removed from that decision. But what do you do when the stock is shooting skyward with seemingly unlimited upside? It depends on what’s driving the price up. If pure speculation is the only thing driving the price, sell half your position and then put trailing stop losses of 20% on the remaining half. In other words, now that stock YYY has risen to $5 a share from my original buy-in price of $3 a share, I sell half my position, and my stop loss price on the remaining half has now moved up to $4.25 a share. This way I’ve locked in my predetermined 67% gain on half of my position of YYY and the least amount of profit I can make on the remaining half is 42%.

Now if earnings and sales are driving the price up, I may take another strategy. Instead of selling half of my position in YYY, I’ll hold onto my entire position, but again institute a trailing stop loss of 20%, moving my stop loss price-point up to $4.25. This is riskier than the first strategy, but the important thing to note is that I am still locking in gains. In this scenario, I still guarantee myself a 42% gain no matter what happens with the stock from here on out.

The key, and I can’t emphasize this enough, is to always take gains off the table or to lock them in with trailing stops. By doing this, you remove your emotions from your decisions. Formulate a disciplined sell strategy and you’ll make a lot more money than you would by trying to forecast the direction of the small and micro-cap stocks you invest in. Plus you’ll save a lot of money on the psychiatrist you won’t have to hire due to all the unnecessary stress you would have caused yourself by not employing these strategies.

So to summarize, always limit your downside and lock in gains with stop loss orders when investing in small and micro cap stocks and you can invest in stocks with enormous potential without the stress associated with the enormous risk of some of these stocks.

© 2006 SmartKnowledgeU.com™

This article may be freely reprinted on another website as long as it is not modified, changed, or altered in any way and as long as the below author byline is included along with the active hyperlink exactly as is.

J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn how to build wealth, not just dreams.

To learn more about how to achieve financial freedom, and investment ideas to dramatically decrease risk and intelligently increase the probabilities of 25% or higher annual returns, click the following link Advanced Wealth Planning Techniques and Achieve Financial Freedom Ideas

Want to know what buying strategies to use when buying stocks that can potentially return triple digit gains? In part one of this series, I told you what factors you must consider when buying a small or micro-cap stock. In part two, I’ll review intelligent buying strategies when it comes to buying small caps.

Rule Number Two: Remove emotions from your buying decisions with a disciplined strategy.

Ok, so let’s assume that you’ve done your homework now and discovered a company that you believe will run up at least 60% or higher over the next year. Decide on a predetermined buying price and do not waver from this price. Period. End of discussion.

Why?

Ok, let’s take a look at hypothetical stock YYY. Company YYY is the industry’s leading innovator in a huge growth industry that has seen the biggest growth spurts in history for the last three trailing quarters, yet the general public still does not know about them. In addition, they have patented technology that lets them protect their first mover advantage and high entry costs into the industry gives them nice barriers to entry. On top of all of this, Company YYY is trading at a ridiculously low P/E and a ridiculously low price of $3. In fact, its price would have to appreciate 200% just to equal the P/Es of the giants in the field. You study YYY’s historical price chart and see some volatility, so you decide you will wait until the price drops to $2.80 to get in. But in the two days you wait for company YYY’s stock to drop in price, it unexpectedly shoots up to $5.50. Or perhaps it plummets way below your $2.80 buy in price to $2.00. On no new significant news.

Depending on what scenario happens, you may be thinking “I’m so dumb not to have bought at $3. I guess I’m just going to have to bite the bullet and dive in at $5.50,” or “This is so great. I wanted to get in at $2.80. Now it’s so much cheaper at $2.00 that I’m definitely going to buy now.”

Right? Wrong.

Stick to your original plan. If you throw your buying strategy in the trash and decide to get in at $5.50, you’re letting emotions drive your decisions instead of logic. If you were only willing to pay $3, why would you possibly be willing to pay 83% more for the same stock just 48 hours later? And if we consider the second scenario where the stock plummets to $2 a share, don’t you think that this merits more caution instead of haste? Remember, in both hypothetical situations, we are assuming there is “no new significant news” surrounding stock YYY to justify these huge price movements. Under these assumptions, the volatility of the stock is probably occurring because of jumpy day traders taking profits off the board or dumping shares.

But let’s take a closer look at why letting emotions creep into your decisions is a bad idea. Let’s look at the situation again where stock YYY blew through your designated buy in price of $2.80 and went to $5.00 in two days. Let’s assume you stick to your guns, wait two weeks, and buy-in when YYY stock finally dips to $2.80. Now employing a stop loss of 15% against your buy-in price, your sell-out price of the stock is $2.38 versus $4.68 if you had bought the stock when it spiked up to $5.50. This huge gap in stop-loss price points may very well be the difference between holding on to the stock and earning 80% gains versus selling out 48 hours later and feeling confused as to whether or not you should buy back in.

To summarize, never throw out a pre-designated buying price for a risky stock due to unexpected price spikes. If this happens, stick to your original buying strategy if you still believe in the stock and wait until volatility decreases before you buy at your pre-designated buy-in price.

Remember, there are literally hundreds of stocks every year that make rapid double or triple digit gains. If it turns out that you missed out on one opportunity because the stock soared right through your buy in price and kept soaring higher or the stock’s price took a sudden plunge, know that there are hundreds of other opportunities waiting to be discovered. If the stock you loved so much never returns to your buy-in price, move on. You’ll find a better stock to buy soon enough.

© 2006 SmartKnowledgeU.com™

This article may be freely reprinted on another website as long as it is not modified, changed, or altered in any way and as long as the below author byline is included along with the active hyperlink exactly as is.

J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn how to build wealth, not just dreams.

To learn more about how to achieve financial freedom, and investment ideas to dramatically decrease risk and intelligently increase the probabilities of 25% or higher annual returns, click the following link Advanced Wealth Planning Techniques and Achieve Financial Freedom Ideas

Are you tired of earning 5%, 8%, even 15% annual returns from your stock portfolio? Want to earn triple digit gains from your stock picks? Not only is it possible but it’s absolutely probable with a few solid strategies.

In Part Two of this article, I reviewed the importance of having strict buying rules to minimize your risk when investing your money in small and micro cap stocks. Here, in Part Three, I’m going to further expand and modify rule number two.

Rule Number Three: Don’t try to buy at “perfect” prices.

In buying small and micro cap stocks, know that you will almost never buy in at the “perfect” price. If you’ve researched a company thoroughly and are confident that its price will move upward over the short or long term, then do not wait for a “perfect” price. Chances are you will almost never buy in at a perfect price. Small and micro cap stocks almost always have greater volatility than large cap stocks and inevitably will have days of rapid price spikes upward and downward. And it’s impossible to be right all the time about when these spikes will happen.

Furthermore, the law of averages should even out for you over time when buying into small and micro cap stocks. Sometimes the price will dip after you buy into a stock and you may experience immediate regret. Other times the stock’s price will rise upward from the moment you buy in and you would have never been able to buy the stock at a lower price. But if you’ve applied rule number one, even scenario in which the stock dips immediately after you buy in shouldn’t cause you to lose faith in your stock pick, because it does take a strong stomach to invest like this. I’ve had scenarios where a stock lost 10% on the same day I had purchased it, only to rebound by 60% in the next month.

So instead of using a specific price point to buy a stock that seriously interests you, use a price range instead. Using hypothetical company YYY as an example, if you absolutely love the future prospects of company YYY, determine a price range that you would be okay with after studying its historical price charts. If you decide that you would be happy buying this stock at a range of $2.90 to $3.10, and the stock is sitting at $3, then go ahead and buy.

I know other financial advisors that will disagree with this advice and declare that if the stock’s technical charts show weakening indices, the wait for a dip in price before deciding to buy. Unless those technical charts are negative in almost every index, I wholeheartedly disagree. Technical indicators are never right 100% of the time, often giving “false” positives and “false” negatives. Furthermore, they are even less accurate with volatile small and micro cap stocks because their inherent volatility makes their technical charts harder to evaluate for optimal buy-in prices. If an “unknown” stock’s story eventually passes through media filters to reach the public masses, its price could spike very rapidly without any technical indications. If you’re solely using technical analysis to decide the optimal buy-in price, you’d be left behind in the dust when this happens. That’s why you should determine a buy-in range, and not an exact price.

Rule Number Four: Invest a smaller portion of your portfolio in riskier small and micro cap stocks.

This is a self-evident rule but I’ll review it anyway, because greed sometimes makes even the most rational of human beings do crazy things. I recommend devoting no more than a maximum of 50% of the total value of your portfolio to small and micro cap stocks. Using a combination of micro and small-cap stock picks and safer large cap stocks can help you easily outperform the S&P 500. But when your small and micro-cap stocks really start to outperform the large cap portion of your portfolio, it is inevitable that the following question will invade your mind:

If my small/micro cap stocks are up 75% and my large cap stocks are only up 15%, why not just shoot for 75% gains in my entire portfolio?

The only reason I recommend against this is because, hopefully, from part I of this article, you gained a sense of how research and time intensive the process is of uncovering great small and micro cap stocks. Frankly it’s not that difficult but it does take LOADS of time. If you build an entire portfolio with stocks like these, unless you have LOADS of time to constantly monitor every one, it’s a much better strategy to just boost your portfolio’s performance every year with great small/micro opportunity stocks while also investing in some less volatile ones that will give you a smoother ride.

© 2006 SmartKnowledgeU.com™

This article may be freely reprinted on another website as long as it is not modified, changed, or altered in any way and as long as the below author byline is included along with the active hyperlink exactly as is.

J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn how to build wealth, not just dreams.

To learn more about how to achieve financial freedom, and investment ideas to dramatically decrease risk and intelligently increase the probabilities of 25% or higher annual returns, click the following link Advanced Wealth Planning Techniques and Achieve Financial Freedom Ideas

In the first four parts of this series of investing in small cap stocks, you learned buying and selling strategies. Now once you carefully research and identify an industry or sector that you are convinced will grow exponentially over the next one to five years, how do you identify the best companies? In this bonus tips article, I’ll discuss how subscribing to the “a rising tide lifts all boats” theory can severely hinder your stock performance.

As of the writing of this article, spring 2006, many sectors look very promising. Precious metals, technology, nanotechnology, renewable/ alternative energy, and so on. But thinking that you can just buy any companies in high-growth sectors without doing considerable research can be disastrous. So here are three tips to help you out in this process.

Tip Number One: In the beginning, think more like an artist instead of an investor.

A creative mind is more important to success in investing than a purely analytical one. If you know creative thinking is not your strength, then interview financial consultants until you find one whose creativity impresses you. Without assessing an opportunity from a creative standpoint, the best stock opportunities will be left undiscovered. When first trying to uncover opportunities within an industry, simply sit down with a pen and a piece of paper and brainstorm.

For example, let’s consider the renewable/alternative energy sector that is making so many headlines today. After President Bush mentioned development of a renewable energy in his State of the Union address and when Bill Gates’s planned $84 million investment in Pacific Ethanol (PEIX) was reported, considerable buzz evolved around renewable energy stocks. To start, write down all the different sub sectors within this niche sector that come to mind. Your list might include wind energy, solar energy, nuclear energy, hydrogen and fuel cells, ethanol, biodiesel, biomass power, hybrid cars, and so on. The point of this exercise is to write down every idea that comes to mind, no matter how silly you may think it is at first glance.

Many times, this simple brainstorming exercise has helped me uncover exciting opportunities in sub sectors of industries that I was not even at first considering. For example, just hearing news about ethanol may lead you to a surprising discovery regarding the potential of wind energy.

Tip Number Two: Make a list of the positive and negative questions regarding the industry that interests you.

This exercise is an extremely important one because it is the exercise that will help you sort out the stocks with the most potential versus the ones with the least amount of potential. When first researching companies within a certain industry sector or sub sector, at first, every company may look promising. Using our above example, you may think that wind, solar, nuclear, and biomass energy all look like winners. However after doing this exercise, the picture will become a lot clearer for you. A partial list of your positive question list may appear as follows:

What is the estimated market size of this industry in the next five years?

Who are the potential buyers of this product?

Will sales of this product have domestic or global appeal?

Will this be a revolutionary product and why?

Any countries or markets already adopting this product and if so, what is the adoption and growth rate in these markets?

A partial list of your negative questions may appear as follows:

What is the timeline for adoption of this product?

Is it one to two years or more likely to be five to ten years from now?

How is research in this industry funded and are these companies’ funding sources sustainable and reliable?

Does the product have limited specific appeal or wide commercial appeal?

What is the political attitude towards this industry globally?

What are the driving forces of potential profit in this industry and how do the companies I am considering meet or benefit from them?

Again, in this exercise, don’t worry about writing down silly questions. It is more important to note every question that you can imagine until all avenues are exhausted. When you are finished compiling your question list, then go to the internet and start “Googling” away to find the answers to your questions to help you narrow down your list to the top three sub sectors. Again, using the energy example, you may discover that while there has been a lot of hype surrounding biodiesel, ethanol, and hydrogen and fuel cells, that wind, solar, and nuclear energy are the most realistic industries for immediate adoption and have already experienced some significant sales and applications (this is just a hypothetical scenario, and not necessarily the reality, to illustrate a point).

Furthermore you may discover that certain governments have already dedicated portions of their budgets to the development of specific energies, making those sub sectors more attractive. Studying government timelines for development of alternative energy sources can even provide a rough guideline to the immediate profitability potential of specific sub sectors. Then, given your findings, identify the top ten companies that are global leaders for each sub sector in your pared down list.

Tip Number Three: Answer the questions you prepared in step number two for your top ten lists.

All companies are not created equal. That is why it is so important to identify the right companies within the right sectors, because there are a lot of wrong companies within the right sectors. To illustrate my point, let’s consider precious metals. Some “mining” companies in the same precious metal niche can have drastically different operations and strategies that create huge gaps in their attractiveness. For example, one mining company may have huge overhead from ownership of heavy machinery and the costs of metal extraction. Another mining company may have zero production costs because it owns no mines, no equipment, and has just negotiated contracts with mining companies to purchase the metals that they extract. Because of these drastically different operations choices, two companies that appear similar on the surface may have net profit margins that differ by 40%.

Furthermore, one must understand where the potential benefits lie in such markets and research how well these companies’ strategies meet these challenges. Is the metal in question soaring in price? If so, has the company you are researching washed away most of tomorrow’s profits by locking in future sales at today’s metal prices? Or do they remain unhedged in their future sales, allowing them to benefit from the growing surge in metal prices? This one strategy alone could separate a huge winner from a huge loser although both companies reside in the same metal industry.

Even if you employ a financial consultant to invest your money, you need to probe to understand what your financial consultant understands. Because many financial consultants are salespeople, they hear about a growth sector and merely find a leading company in that sector and believe that you will benefit. Their recommendations and explanations may even sound logical to you, but never agree to buy into a stock position unless your consultant can specifically answer questions as to why the industry is poised to grow so much, and how the specific company he or she is recommending is strategically positioned to benefit from the growth of its industry. Remember, here you always want specific over general explanations.

In summary, (1) Creative thinking will uncover the best opportunities because often the best opportunities are not your original ideas, but are the ones associated with your original ideas; (2) Unconventional questions will assist you in drilling down wide lists of prospective companies into a narrow list of top prospects; and (3) It is not being invested in the right sectors that will give you great performance, but specifically being invested in the right companies with the right management with the right strategies and right opportunities within the right sectors that will yield great performance.

© 2006 SmartKnowledgeU.com™

This article may be freely reprinted on another website as long as it is not modified, changed, or altered in any way and as long as the below author byline is included along with the active hyperlink exactly as is.

J.S. Kim is the Managing Director of SmartKnowledgeU™. He has over thirteen years of experience in finance and financial services, and has earned a BA in Neurobiology from the University of Pennsylvania, a Master in Public Affairs from the University of Texas at Austin, and an MBA with a concentration in finance from the McCombs Business School, University of Texas at Austin. He is the inventor of the revolutionary MoneyPing™ investment strategies, a novel approach to learn advanced wealth planning techniques and how to build wealth, not dreams.

To learn more at J.S. Kim’s blog "The Zen of Investing", click the following link, Advanced Wealth Planning Techniques and Achieve Financial Freedom Ideas

Micro-cap Stocks are much maligned for being too volatile for the average investor. But, as experienced investors know, highly volatile investments can yield the best investment returns. A quick look at the best-performing stocks of 2005 proves this fact.

The Best Stocks of 2005 Were All Micro-caps

Of the 25 stocks that performed best in 2005, only Nutri/System (NTRI) had a market cap of $100 million at the start of the year. Ocean West Holding (OWHC), which was up an astounding 2,170% for calendar year 2005, ended the year with a mere $59 million market cap (that’s after returning 2700%).

To be sure, micro-caps are volatile, (Ocean West is down over 50% after the first quarter of 2006, erasing most of 2005’s incredible gains), but the potential returns still make them a worthwhile risk for a small portion of your investment portfolio.

Of the 25 top-performing stocks of 2005, all of which returned at least 510%, 13 were down as of this writing (April 15, 2006), and 12 were up. The average stock that was down had lost 19.93%, which represents about one-quarter of its 2005 gains.

Of the 12 stocks that were up in the Year-to-Date period, the average return was 88.68%. Half of those stocks had already returned over 100% returns (CanWest Petroleum; U.S. Gold; BioTransplant; Warrior Energy Service; Stem Cell Innovations; and Transnational Automotive Group).

An equal investment in all 25 of these stocks on January 1, 2006 would have yielded a 32.20% return by April 15.

Don’t Let Your Guard Down

Much of the criticisms of micro-caps are true: they are highly volatile; they are potentially the targets of pump-and-dump schemes; they can be difficult to liquidate due to low trading volume.

For these reasons, due diligence is extremely important. A company whose SEC filings are habitually late, or one that issues amendment after amendment for important filings like the quarterly or annual reports is usually not a solid investment.

But these are just red flags, and the company’s fundamentals are the ultimate arbiter of its worth. In times of rising interest rates, the balance sheet is particularly important, since high levels of long-term debt can cripple small companies as rates rise.

Finally, micro-caps should not represent more than 10% of any individual portfolio, but ignoring these tiny gems will deprive investors of potential breakouts.

B. Patrick Regan is a freelance writer and a staff writer at StocksAndMutualFunds.com.

Talk to most traders and ask them about the OTC markets, and you’ll likely get either a story about someone who made it big, or someone who lost it all. Like Las Vegas, investors can always tell you a story. The question for you is simple: is this a place to invest your hard earned money.

The answer is yes and no. The key is in recognizing the risk involved. Keep risk to a minimum by identifying which small caps have potential, and which are a trap, and you may find yourself in the staring role of one of those stories about the guy who made it big. If you fail to take heed of the warning signs, you’ll find your money, hopes and dreams fade just as quickly as gamblers in Las Vegas.

The very fact that small caps trade at such low volumes increases the risks involved in investing in them. The Securities and Exchange Commission (SEC) strongly suggests traders of small caps to remember that these stocks typically trade with very low volumes on average. This makes finding buyers when you want to sell, and sellers when you want to buy more difficult. As a result, you may not get the stock at the price you want. This can result in buying too high

Despite the risks involved, small caps are often attractive investments to investors for various reasons. If you are new to investing and looking for the chance to return a high yield for a relatively low investment you are likely to come across some microcaps. Its not surprising that investors are attracted to small caps. A move of a few hundreds of a penny can mean big returns for you. For a $0.10 stock to move up 20% requires a move of only $0.02. If the stock moves to $0.20, you have doubled your money. If the stock starts to move, you can double or triple your money within days. You won’t find that kind of return on the major stock exchanges.

On the other hand

There is also a strong potential for fraud with some buyers artificially ‘enhancing’ or driving the costs by buying large amounts of shares and raising the perceived value of essentially worthless stocks. Most investors who fall for this lose many when it comes time to sell.

Most financial advisors will suggest not investing more than 10% of your portfolio on microcaps

It is important to remember that not all of these companies are frauds and many of them have a great deal of potential. Some are new businesses that are working hard towards their goal of earning a spot on the larger exchanges. Do your research in order to decrease your risks of landing with a declining or dishonest company. Often, most traders are often convinced that one good investment can make them a nice tidy profit. While this is true it is better to invest in a company that is showing slow and steady growth than one you are hoping will sky rocket over night. Take the time and do your research rather than gambling with your investment.

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