Most of the names we've looked at over the past few weeks have been large-cap names. But there are a host of companies that trade in the micro- to small-capitalization area of the market and these companies offer great opportunities if you recognize the risks inherent to them and take steps to protect yourself.
For example, most micro- and small-cap names have high beta values, meaning the equity price moves around a lot more than the general market. Volatility isn't a bad thing in and of itself, but it cuts both ways. Another problem with smaller companies is that they typically do not have a significant amount of institutional sponsorship nor do they trade a large number of shares on a daily basis. This leads to large bid/ask spreads.
To trade smaller stock issues that share these traits, you have to do two things. First, you have to trade smaller. If your normal trade size is 4% of your overall portfolio, then you have to cut it down to 1% or 2% when trading one of these issues.Secondly, you have to be able to withstand large swings in price and use that as an opportunity, not a failure. To do so implies that you will scale into and out of your positions always making purchase and sells at the extremes. So let's take a look at one of these names where opportunity is abundant on the long side of the equation. Bofi Holding (BOFI) is a consumer-focused, FDIC-insured, nationwide savings bank that primarily operates over the Internet. Let's start with the long-term time frame at which we can see that BOFI is in a confirmed uptrend (see monthly chart above). If there is anything to worry about in the long term, it is that the uptrend channel is rather steep, and a breakout of that channel should lead to a nice-sized correction when it finally occurs on a closing basis.
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