Dear Investor:
We really enjoy trading stocks that are $10 and under. Often they
provide the chance to enjoy high percentage gains and, of course, at
worst, the risk is limited to what we paid for the stock. In almost all
circumstances the real potential loss would be much less than that
because we would have an early exit in place in case the stock turned
against us.
Ordinarily, if you are a fundamental trader you wouldn't be crazy
about a cheap stock. Often, they are cheap for a reason, but don't
think that the reason is always bad. Many times a cheaper stock won't
even have a P/E (price to earnings ratio). When there is no P/E, that
means there were no earnings. Remember your middle school math --
anything divided by zero equals zero. There may be an excellent reason
why a stock has no earnings. It may have an important product in
development and has had to spend revenue and borrowed money on research
and development.
Just because a stock is cheap doesn't mean a trader can't make
money trading it. Don't confuse a good company with a good stock.
The point is that often the lesser known and cheaper stocks can
provide very exciting returns. Traders and investors in these cheaper
issues are often "betting on the come." Often the companies with
cheaper stocks may have great management and great product; they may be
just getting up a head of steam. They need not be ignored by the
careful trader or investor.
Since fundamentals may be misleading on the lower priced stocks, I
believe they are best traded using technical analysis.
High potential percentage gains are one of the things I like about
trading lower priced stocks. Another thing I like is that the risk is
often small. If I buy a stock for $2.50, that is my maximum risk --
$2.50. Even if the stock dropped to 0 (and I did nothing while that was
happening) the most I could lose would be $2.50.
My name is Bill Kraft, as the editor of the $10 Trader, I search the $10 and under stocks with a couple of proprietary
formulae I have developed. I am always trying to find relatively low
risk plays with a potential reward to risk ratio of 2.5:1 or better. Of
course, cheaper stocks can be risky. Companies can disappear quickly,
but so can their pricier cousins (remember Worldcom, Enron, United
Airlines before the bankruptcy). All trading involves risk (so does
living life). Each of us needs to know our own risk tolerance, each of
us must educate ourselves to understand the risk in any position, each
of us must manage our own money and our own risk. That being said, I
have found that trading the $10 and under stocks can limit risk and
provide a potential for very significant returns.
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