It seems new investors get first attracted to penny/small cap stocks when they first enter the trading world :
Purpose of this thread is not to scare you off from investing in them but just a word of caution. here goes:
1. In South Africa small caps always look attractive with good P/E , net asset values etc but they are the least liked shares by fund managers.
2. Liquidity always low on these type of stocks IE you will always find low volumes of trade compared to the larger capped stocks( top 100 shares on JSE)
3. Point i am making on 1 and 2 above is that if a fund manager wants to dispose of his holding in a particular small cap stock and because of low liquidity floor may never have a bottom. If you on the wrong side of the trade , you could get burnt or feel a lot of pain.
4. In bull markets these shares will rise but at a slower pace than large cap stocks
5. In bear markets they fall at a faster pace than the larger cap stocks.
6. If your portfolio contains 10 small cap stocks the chances are :
a. one out of 10 may succeed to become a winner and turn in to a larger cap stock going forward at least 10 years. A winner
b. One of the 10 may be a take over target because of its low value. Here you may win
c. One of the 10 may be bought back by management and delist You may just break even or may some money
d. The other 70% in my opinion will make you feel pain, lose money , go out of business and most important of all you could have better used your funds to invest elsewhere.
7. Two types of monies when investing. Clever money and dumb money. Always try to follow the clever money. How do you know what is clever or dumb money?
a. clever money : buying when price going up.Dumb money selling when price going up
b. dumb money : buying when prices are going down . Clever money selling when price going down
I have a few dogs in my portfolio and ive paid school fees on them. Learnt my lesson the hard way.
So newbies im giving you a chance not to pay school fees. Take the lesson or shove it, choice is yours.