If you are wanting to invest in small cap shares there are a few things you need to consider before you begin. Before starting to invest in small cap shares you need to perform an assessment of your risk profile and make sure they are ideal for you. Investing in penny shares is risky and need to make sure you have the capacity to deal with this risk as you can do well in this type of environment if you are after this type of satisfaction.
If you do not have much spare money and are in a difficult financial position then you are better off putting your money into bonds and more established stocks as these investment vehicles are considered a better option. Also if you have plenty of money to invest but you do not like taking big risks then it is also best to avoid investing in penny shares.
The definition of small cap shares is those companies that have a share price of less than $5.00. If you want to begin learning about the stock market then penny shares can be a good starting point although you should never invest money that you cannot afford to lose. Looking for suitable companies to buy is the next step after determining if your risk profile fits in with micro cap stock investing. There are a number of different factors you need to consider before investing into a company. {You need to check the reputation of the company and its management, the previous history of the company including company financials, profit and revenue streams}. This type of research is referred to as fundamental analysis which is used to define the intrinsic value of the company.
It is important to understand that the actual trading price of the share is a reflection of a combination of market factors at that time but through your research you should be able to work out what the fair value of the company is. You can minimise your risk by finding companies that have a high intrinsic value and only investing in those.
Things do not always go according to plan in the stock market and you need to ensure that you spread out your risk by diversifying your investments as you could end up losing all your money if you invest it all into the one stock.
To summarise investing in penny stocks comes with substantial risks involved especially compared to other more conventional shares.
You can minimise your risk by ensuring you conduct your due diligence and do not overexpose yourself to one company and eventually you can make a good profit from micro cap stocks
