subject: Your Guide To Small Cap Stock Investing [print this page] Your Guide To Small Cap Stock Investing Your Guide To Small Cap Stock Investing
Micro cap shares are small businesses that have low cost shares on offer and the idea is that by investing in these stocks you can make a profitable return on a small outlay. As with any new venture it is always good to get back to basics before going any further.
When you are investing in the stock market you are governed by two choices - when to purchase and when to sell. Lets look at the reasons which help us decide when to purchase and sell as we know that the actual process of buying is done through placing an order with your broker
Interestingly it is often easier to determine when to purchase by first looking at when we want to sell.
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So when do we want to sell? You do not want to sell before you think a stock has reached fair value otherwise you will miss out on profits. You can calculate a rough estimate of what you perceive the fair value of a company to be. As a general rule fair value is reached when a stock is yielding at a price that is 3% above the current free risk interest rate for e.g. the 10 year Treasury bond rate.
Check out the following example for help:
Recently the current 10 year Treasury bond rate was 2.74%.. To calculate the fair value of the stock then you would expect it to be yielding 3% higher than this rate so 2.74 + 3 = 5.74% You can calculate the price to earnings ratio by inverting this result so (100/5.74) is equal to 17.42.
So based on this result we know that the company has reached fair value when the P/E ratio has reached 17.42..Therefore if we want to sell the company at a P/E 17.42 then in order to make money we want to purchase shares when the P/E is less than 17.42.
The P/E ratio should never be the only reason you are investing into a share and this information should be used as a guide only.
You should check out the financial position of the company as well as factor in any unseen events that could affect the price of the stock.
A penny stock that sounds too good to be true usually is and even if its going cheap you should never waste your money on this one!
Always make sure you do your due diligence first before you buy.
Penny Stocks can be a great addition to you investment portfolio, check out how you can learn to become the ultimate Small Cap Stock Picker}
