Should You Still be Trading Small Caps?
Small-cap stocks are companies whose market value is anywhere between around 300 million dollars and 2 billion dollars. This category encapsulates most, if not all, the smaller companies that are still publicly tradable. Should traders take a chance on trading small caps? It really depends on their strategy and even the size of their account.
Many novice traders gravitate towards small caps because their stock prices tend to be rather low. At times, they go for around 50 cents a share or less. This means that with a couple of hundred dollars, any trader can buy up a decent portion of the company. In some cases, even small traders could significantly affect the stock price. These low entry price points make small caps a rather appealing option. On top of the low stock prices, small caps tend to fluctuate in value quite a lot throughout the day.
Day traders can take advantage of these price variations to make quick profits with small caps. Having said all this, why do some people shy away from these stocks? The speed at which the prices for small caps fluctuate can be too much for some traders. This can lead to big wins as well as big losses. At times, people who enter the market without the right strategy are just on this ride as passengers hoping for the best.
It’s essential to understand the tendencies in small caps to make price entries as a day trader, with a scalping strategy that can help you be effective when trading these stocks. When that’s not in place, trading small caps could be a bit like playing a game of chance. That’s where things can go south quickly. People who’ve experienced the downside to these low-priced stocks are afraid to go on that ride again.
Who then really benefits from trading small caps? As mentioned, traders with a smaller budget can definitely benefit from trading small caps. Small caps have also been a great refuge for some of the smaller funds that invest in the market. The lower prices allow these funds to buy up a considerable amount of stock and affect the price very much in the way that larger funds do with some of the blue-chip stocks.
There are plenty of other benefits to trading small caps that any trader can take advantage of. The quickness at which these prices move can teach a trader to read market tendencies in a way that they may never be able to if they stick to the blue-chip stocks. You could argue that there’s a higher risk involved in this process, but the good thing is that it’s a lower investment that you’ll have to make to get past the learning curve that all traders have to go through. Trading small caps can sometimes feel like being thrown into the deep end of the pool. With the right tools and strategies, though, there’s a better likelihood that you’ll eventually learn to swim that way!
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