| id="body"> | | | | are restricted from selling off their shares for six |
| Everyday, there is a new eBay or Microsoft or Dell | | | | months after an IPO. Let's look at our hypothetical |
| company that files for an IPO and that will make the | | | | stock ABC again, assuming it is now four months |
| early buyers of its stock very wealthy in several | | | | after the IPO. Many times, share prices of companies |
| years. The trick is how to find them and invest in | | | | start falling about two months before a lock-up |
| them safely. Sure a General Electric or Microsoft | | | | period expires in anticipation of insiders selling off |
| could possibly have a bump up in share price in one | | | | their shares and flooding the market with volume |
| year of 30% or 40% with the release of a | | | | once they legally can do so. If stock ABC is trading |
| phenomenal product or service, but the chances of | | | | relatively flat and there is no added demand right |
| earning 70%, 100%, or even 300% in one year with | | | | before insiders unload their stock, an overnight |
| large cap companies is quite slim. But it's not so with | | | | doubling of the stock's float is bound to dilute the |
| small and micro cap stocks. In fact every month, | | | | stock price, and possibly do it very rapidly. It's simply |
| there will be another micro or small cap stock that | | | | supply and demand at work. There is now twice the |
| nobody has heard of that will make loads of savvy | | | | supply of stock on the market without any increased |
| investors rich. | | | | demand. |
| So the key is how do you play riskier stocks like | | | | However, let's look at the flip side. Let's consider a |
| this? There are five rules you should always follow. In | | | | company XYZ that has $20MM of outstanding shares |
| Part I of this series, I'll review rule number one. | | | | and a float of $17MM. Positive news surrounding |
| Rule Number One: Do your homework. | | | | company XYZ has steadily driven its stock price |
| When you find a micro or small cap stock that | | | | higher, right up until the point the lock-up period for |
| excites you, make sure you do your homework | | | | insiders expires. Let's assume, even though prices |
| before making the decision to buy in. Always | | | | have been climbing steadily, that the insiders still |
| research the float of a small stock. Why is this | | | | decide to cash out and sell off $2.5MM of their shares |
| important? For a number of reasons. Let's consider | | | | immediately. Because this company's float is so small |
| this scenario. You research a small stock ABC that | | | | and demand is high, release of additional shares may |
| you really like. You discover that ABC only has | | | | create a buying frenzy that will drive prices up even |
| $10MM of outstanding shares, a float of $5MM | | | | more rapidly. |
| because insiders hold the other $5MM, and average | | | | So to summarize rule number one, always do your |
| daily volume for the past three months of $3.7MM. | | | | homework and know everything you possibly can |
| Well you could be in for a very bumpy ride given the | | | | about the stock you are buying. As I've |
| fact that daily volume is averaging 75% of the float | | | | demonstrated, in one situation a small float may hurt |
| (total amount of shares owned by the public). This | | | | a stock's price while in another situation, a small float |
| discovery alone may make you reconsider buying the | | | | may tremendously help the stock price. |
| stock. | | | | I'll review the remaining four rules in the remaining |
| Furthermore, if stock ABC has recently had its initial | | | | articles of this series. |
| public offering (IPO), then you must absolutely find | | | | © 2006 SmartKnowledgeU. |
| out when its lock-up period expires. Usually, insiders | | | | |