The Two Biggest Mistakes That Small-Cap Investors Make…and How You Can Avoid Them

Earlier this week in Money Morning, I revealed my four top tips for small-cap investing success.

You can think of them as your insider’s guide to big capital gains.

Investing in small-caps is the best way that you make money in the stock market.

But you should know that small-cap stocks bring danger as well as opportunity.

Unseasoned investors fall into traps.

You might find that losing money in the stock market can be educational. Sometimes it’s even character-building. But losing money is rarely fun, and it’s often an expensive education.

I want to give you that education without the price tag.

Today I’ll show you the two biggest mistakes that cost small-cap investors real money. The first mistake comes from backing a loser…and the second mistake comes from missing a winner.

Whether you’re a beginner or a veteran, I trust you’ll find these warnings handy.

Warning #1: Don’t let losers run

This is a simple warning, but it would amaze you how often professional investors ignore it and blow themselves up.

Let your winners run, and cut your losers short. You achieve this by setting and sticking to a trailing stop-loss level.

That’s a stock price where you’ll admit that your idea hasn’t worked and you want to move your capital onto more exciting opportunities.

Depending on your tolerance for risk and loss, you might set a trailing stop loss 30%, 40% or 50% below your buy price.

We do this so that when we take a loss, we take as small a loss as we can.

It ensures that if I make a huge mistake and recommend that you buy a total dog, the stock market won’t wipe you out with a 100% loss.

Once you’ve identified an interesting stock, here are the key points: Establish your buy price, your sell price, and set your trailing stop-loss. This takes emotional anchor points out of the picture.

You’ll determine those points based on what you think the company’s worth and your appetite for risk. Those are personal decisions that only you can make.

This is the best way to lock in speculative gains when you make them, and limit losses when a story doesn’t play out.

Of course, I watch all of our stocks every day…and I don’t let losers run.

Warning #2: Small-caps — not low-priced stocks — hold the keys to riches

Here’s the single biggest threat to your success as a small-cap investor: obsessing about share price instead of position size and percentage gains.

Most investors — maybe even you — have an unhealthy fixation on share price. And that’s a problem.

Read the rest of this article at Money Morning