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Microcap Performance: A PSA for Penny Stock Haters

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Written by Timothy Sykes
Updated 1/9/2023 8 min read

Are penny stocks worth it? I think microcap performance speaks for itself…

For the past year, microcap performance has been a lot more impressive than any big-name stocks out there … That creates opportunities for traders.

As of April 2021, I’ve made over $7 million in profits* over the past 20+ years by trading penny stocks — also called microcap stocks due to their tiny market capitalization.

One of my main goals as a teacher is to educate my Trading Challenge students about how penny stocks really work. I want them to learn how to potentially take advantage of the insane price spikes they can experience.

It’s not just a matter of loading up on random low-priced stocks. It’s all about having the right mindset — and having a strategy. Here’s what I want traders to understand about microcap performance…

(*These results are not typical. Individual results will vary. Most traders lose money. I have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose.)

How Microcap Performance Dominates ‘Real’ Stocks

Here’s a great example of how microcap performance has been dominating the market for the past year.

Check out the chart in this blog post

It details the yearly gains for ETFs representing different segments of the stock market. It shows microcap performance compared to small-cap stocks and large-cap stocks from the Nasdaq and S&P 500.

The data is pretty compelling:

  • Microcaps +155.7%
  • Small-caps +121.5%
  • Nasdaq 100 +89.31%
  • S&P 500 +74.64%

Not sure what it all means? Let’s break it down…

Breaking Down Microcap Performance

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This data offers a few key takeaways.

First, it demonstrates what an exceptional year it’s been in the stock market. These are some impressive results across the board.

But second, and most importantly … Microcap performance is DOMINATING the market.

To put it in perspective, both the Invesco QQQ Trust and the SPDR S&P 500 ETFs track the top companies from the Nasdaq and S&P 500, respectively.

That includes big-name companies like Amazon.com, Inc. (NASDAQ: AMZN) and Netflix Inc. (NASDAQ: NFLX).

On the other hand, the iShares Micro-Cap ETF and iShares Russell 2000 ETF are tracking small-cap and microcap performance.

On the whole, this data tells us that microcap performance is as much as two times higher than large- or mega-cap performance.

The Trouble With Large-Cap Stocks…

In 2020, the average return for the S&P 500 index was 18.4%.

Don’t get me wrong. That kind of return is great for bigger stocks.

But I’m not patient. Roughly 20% returns might be good for saving for retirement … But they won’t grow a small account quickly.

Microcap performance offers a lot more short-term potential. So why isn’t everyone trading microcaps? Because they don’t understand this crucial thing…

Setting the Record Straight on Microcap Performance

Penny stocks might not make sense to stock market newbies. It’s understandable.

Big investors mostly ignore penny stocks. When they are mentioned in the news, it’s usually in stories about how sketchy and dangerous they are.

This is part of why I teach … I want to cut through the BS. I want to set the record straight on penny stocks.

I also want people to understand the risks that come along with impressive microcap performance.

Despite the amazing potential of penny stocks, I don’t trust these companies as far as I could throw them.

I know — this might sound kind of crazy and counterintuitive. So many stock market lessons are. Let’s make some sense of it…

Making the Most of Microcap Performance

The ‘traditional’ approach to the stock market is to find companies you believe in and invest in them.

That approach doesn’t really work with microcap companies. The thing is, most of them will eventually fail.

That sounds scary at first. Why would you ever put money into a company that’s going to fail?

Penny Stocks Are Not Investment Vehicles

Before penny stocks eventually fail, they can potentially experience huge price spikes in short periods of time.

Think of a big company like Apple Inc. (NASDAQ: AAPL) … It’s like a big freighter stuck in the Suez Canal. It takes a LOT to get it moving.

A penny stock, on the other hand, is like a speedboat. It doesn’t take much to get its motor running. The most dubious of press releases can create huge price spikes.

penny stock checklist

When the conditions are right, I attempt to ‘ride the wave’ of these types of moves.

I’m not investing in these companies. I’m just trying to take advantage of these short-lived price spikes. My trades are very short term. Sometimes minutes, sometimes hours. Rarely overnight.

Shift Your Perspective

One of the biggest obstacles to trading penny stocks isn’t the actual process of trading. It’s shifting into a new way of thinking about stocks.

This isn’t investing. It’s not about believing in these companies.

I don’t believe in these companies.

When I’m talking about my trades in my Trading Challenge chat room, in my DVDs, or in my Profit.ly commentary, you might notice that I rarely even mention the names of the companies.

I don’t care what the company names are or what they do — other than to know they’re in a hot sector. But beyond that, they’re all just tickers and potential vehicles for my strategy.

History Repeats…

History never repeats exactly. But it’s usually pretty close…

The state of the market right now reminds me a lot of the stock market in 2000.

At the time, I had no idea how exceptional the market conditions were. Microcap performance was incredible then, too … It’s when I made my first million.*

But the high level of potential reward always comes with plenty of risk.

Do yourself a favor — study the past to prepare for what the future could bring.

I talk a LOT about the 2000 market conditions in my autobiography, “An American Hedge Fund” … Check it out to get a better understanding of the risks associated with penny stocks during market conditions like we’re in now.

Mighty Microcap Performance: Be Prepared!

Microcap performance is hotter than ever in 2021. How can traders take advantage of it?

Remember: there are no guarantees in the stock market. Even with the hottest market and potentially biggest bubble in decades, it’s still possible to lose.

Trading is a battlefield. By educating yourself, you’re doing what you can to prepare yourself for battle.

When you understand how penny stocks behave and learn the setups that play out over and over, you’ll have a better understanding of the mechanics of the market. It can help you react from a place of knowledge versus trying to anticipate.

Are you ready to increase your knowledge? Consider applying for my Trading Challenge.

Do you understand the risks and rewards that come with this kind of microcap performance? Leave a comment … I love hearing what you have to say!

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”