{"id":30293,"date":"2012-06-18T03:10:20","date_gmt":"2012-06-18T07:10:20","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/small-cap-stocks-a-thrilling-risk\/"},"modified":"2012-06-18T03:10:20","modified_gmt":"2012-06-18T07:10:20","slug":"small-cap-stocks-a-thrilling-risk","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/18\/small-cap-stocks-a-thrilling-risk\/","title":{"rendered":"Small-Cap Stocks \u2013 A Thrilling Risk"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

‘We estimate that an area of just one square kilometer [0.39 square mile], surrounding one of the sampling sites, could provide one-fifth of the current annual world consumption of these elements.’<\/em> – Yasuhiro Kato, Tokyo University, The Wall Street Journal<\/em><\/p>\n<\/blockquote>\n

We’ll come back to this quote in a moment.<\/p>\n

But first…<\/p>\n

Today, We’ll talk to you about risk and return.<\/p>\n

<\/span>
\nIf you want to be successful in this game and make a lot of money, it’s important you understand it. But it’s also important you understand what effects risk and return.<\/p>\n

The payoff for taking a bigger risk is the chance for a greater reward. For adrenaline junkies, chess is a low-risk activity. It won’t get their blood pumping, but they’re also not likely to get injured.<\/p>\n

On the other hand, sky diving is high risk. Jumping from a plane at 15,000 feet is sure to set anyone’s pulse going. But the flipside of the thrill is, when compared to chess, there’s a higher risk of an accident.<\/p>\n

But some people take the risk because they enjoy the reward – the thrill…the rush.<\/p>\n

Investing is similar. Stick your cash in the bank and you’ll get a nice 5-6% return. But you won’t get much – if any – excitement.<\/p>\n

Small-Caps Stocks – High Risk, High Reward<\/h3>\n

<\/center><\/p>\n

The opposite of cash investing is small-cap stock investing<\/strong>. You can rack up gains of 50%, 100% or even 300% in a matter of months. That’s the reward. The risk is the price can zip all over the place – up 10% one day, down 5% another.<\/p>\n

If you can handle that kind of action, then small-cap investing<\/a> is for you.<\/p>\n

But what’s that got to do with the quote at the top of this letter?<\/p>\n

It’s an example of how the risk and reward for a stock can change overnight.<\/p>\n

Take last year’s Japanese discovery of a new deposit of rare earths as an example. It could provide up to one-fifth of the current annual demand. There’s only one problem. The deposit is four kilometres below the Pacific ocean surface.<\/p>\n

Last year, rare earths stocks<\/a> were all the rage. We tipped a couple and investors made good returns. But when our trailing stop order was triggered, we sold out for gains of 192% and 130%.<\/p>\n

But big price moves can have an interesting impact on investors. For instance, we tipped Lynas Corp [ASX: LYC]<\/strong> at 50 cents. We sold at $1.46.<\/p>\n

Now, if an investor has a price target of $3 on the stock, buying at 50 cents is a great punt. The downside is only 50 cents per share…whereas the upside is $2.50 per share. In other words, the risk reward ratio is 1:5.<\/p>\n

But if you buy at $1.46 and the price target is still $3 the risk reward is 1:1. You’re risking $1.50 to make $1.50. Don’t get us wrong, for some stocks that’s fine.<\/p>\n

But for a high-risk play like rare earths, betting $1.50 to double your money isn’t great odds.<\/p>\n

For the past three years or more, rare earths prices and stocks have traded on the basis of limited supply and China’s near-monopoly on the industry.<\/p>\n

But then, out of nowhere a report reveals the discovery of a deep-sea rare earths deposit. So now investors think, “What will that do to the supply, demand and price of rare earths?”<\/em><\/p>\n

Suddenly the idea of a Chinese stranglehold and ever-increasing rare earths prices doesn’t look so strong.<\/p>\n

For prices to go higher the news has to be better and better each time. But with few exceptions, that’s not possible.<\/p>\n

Buy Small-Cap Stocks Early<\/h3>\n

<\/center><\/p>\n

Buying small-cap growth stocks<\/a> means getting in before other investors know about them.<\/p>\n

While this is a high-risk strategy, in one way it’s less risky than buying late. Simply because by the time most investors find out about it, they’re buying into a rising stock and all the known good news is built into the stock price.<\/p>\n

But once the momentum stops, it can be tough to get going again: the stock isn’t cheap anymore, so it’s less attractive to small-cap punters, and the momentum has gone so it’s not attractive to momentum investors.<\/p>\n

The end result is the stock gets stuck in a trading range, waiting for more news to push the stock out of it.<\/p>\n

That’s where rare earths stocks are now.<\/p>\n

Right now, at current stock prices investors have seen it all before. It’s just not enough to convince new investors to pay these prices.<\/p>\n

Of course, this isn’t unique to rare earths. We’re just using it as an example.<\/p>\n

But eventually stock prices fall to a level where they are worth buying.<\/p>\n

We’re now ready to take a punt on some beaten-down stocks…stocks we believe are trading at fair price, and where the risk\/reward could see you make big triple-digit percentage gains, rather than small double-digit gains.<\/p>\n

Kris Sayce
\nEditor, Australian Small-Cap Investigator<\/strong> <\/p>\n

From the Archives…<\/em><\/strong><\/p>\n

The Problem With the Spanish Bailout<\/a>
\n2012-06-15 – Keith Fitz-Gerald <\/p>\n

Australian Housing – How to Avoid This Pauper’s Retirement Trap<\/a>
\n2012-06-14 – Kris Sayce <\/p>\n

Why Warren Buffett is Loading Up on Tungsten<\/a>
\n2012-06-13 – Don Miller<\/p>\n

China’s Economic Data Statistics: Just Add Salt<\/a>
\n2012-06-12 – Dr. Alex Cowie <\/p>\n

Why Graphite is One of the Few Places For Savvy Investors to Make Money<\/a>
\n2012-06-11 – Dr. Alex Cowie <\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nSmall-Cap Stocks \u2013 A Thrilling Risk <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au ‘We estimate that an area of just one square kilometer [0.39 square mile], surrounding one of the sampling sites, could provide one-fifth of the current annual world consumption of these elements.’ – Yasuhiro Kato, Tokyo University, The Wall Street Journal We’ll come back to this quote in a moment. But first… Today, We’ll … <\/p>\n

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