An investor should be very careful when trading in small stocks because they often witness sharp price movements. While many investors are convinced that high volatility is common among smaller stocks, often there are unusual reasons for such movements and investors can end up booking huge losses. Extreme care should be taken to protect oneself from such situations. Here are a few factors that need attention.
Stocks and volume
There are many listed companies with small equity base and their shares are traded thinly in the market. It is often such scrips that see sharp increase in prices and tempt investors to enter the arena, expecting high returns.
Such a position is especially true in bad times when investors try and make a quick buck to cover up part of their losses in other areas. However, the low volume often means that investors are sold shares at a higher level and then the volume dries up along with the fall in price. In such a position, an investor is left with loss in hand and no way to exit the investment.
Investors also need to keep an eye out for any kind of manipulation that might be taking place in a stock. This will mean an unusual activity, either in terms of price or even volume, especially when the fundamental position of a company does not warrant such movement.
This is evident in many cases and if there is a movement that cannot be explained then the investor would do well to ensure that they remain outside the action area and do not risk their hard earned money in such a stock.
One of the best ways to tackle this position is to have certain parameters while making the investment. This will ensure that there is a proper policy in place when taking a decision. This will require setting certain guidelines that will determine a buy and sell decision and when this happens there is lesser chance of an investor drifting into the area that can pose major risk. Following these guidelines is however a tough task and an investor should be alert and active in the process. It also requires a large amount of discipline to not get distracted. Else, it could lead to wrong decisions and losses.