Page 356 - THE MARKET WHISPERER

352 PART 10 - Winning Trades

Trading Small Caps

Special significance is applied to trading in low-priced stocks. Many
traders love them because of their high volatility. Known as “small caps,”

some such stocks move through ranges of tens of percentages during a
single day and are highly popular among risk-loving traders. Small cap
trading requires the trader to be highly proficient in the technique, and

is therefore not suited to novice traders with insufficient experience who

could easily be drawn by the low price and theoretical potential of large

profits arising from high volatility.

SMART We define “low-priced stocks” (small caps) as stock being
MONEY priced below $10. Most funds worldwide are prohibited
from buying stock priced at less than $10, which accounts
for their high volatility.

What is a “small stock” or “small caps”? There is no absolute definition,

but the currently accepted explanation defines it as stock from a company
with a market value of between $300 million to $2 billion. To calculate
a company’s market value, its stock price is multiplied by the number

of shares issued.This information is available from sites such as Yahoo
Finance.

The definition of small caps has changed through the years. For example,
stocks currently considered “small” may have been considered of mid
to high-market value twenty years ago. Before entering the stock during
trading hours, should we perform a multiplication exercise to assess
the company’s market value? Of course not; that is why we search for a
common denominator that makes checking fast and easy. The simplest
solution is to fix a price: almost all stocks traded below $10 are “small
caps.”

Why are small caps more volatile than others? Two reasons apply: due

to the higher risk in small caps (their title being indicative of their inherent

risk as issued by small companies), and because for the greater majority of

international funds, a standing prohibition prevents them from investing
the public’s money in inherently volatile stocks. Funds buy in large