Junior resource stocks have trading profit potential along with many pitfalls
SmallCapPower | March 2, 2017: Resource investing has created great wealth for a few but has left many speculators poorer. Like casino gamblers, most small resource stock buyers motivated by one or two wins continue to play the game until the ‘House’ has their money. Here’s a few common mistakes retail investors make speculating in junior resource stocks.
1. Get in on the cheap: A stock trading at $0.01 per share needs only a nine-cent gain to be a 10 bagger. Unfortunately, a $0.01 stock can go to zero as easily a one trading at $0.50 (in fact, more likely and usually quicker). Remember, it’s a one-cent stock for a reason.
2. Continue to average down: If you liked a junior resource stock at $0.50, it should be twice as appealing at $0.25. Buying more shares as the price continues to fall has proven to be a great way to lose money in this space.
3. Arrive late to the party: The resource sector has produced spectacular speculative bubbles, all of which will eventually deflated. It’s tempting to jump into a stock that has already made big gains – I guess it’s human nature to not want to be left out.
4. Think small: Tiny projects often produce tiny gains, or no gains at all. About 90% of the money made in the resource sector comes from just 10% of the projects, which are often substantial in size and usually have the backing of the biggest and best players in the industry.
5. How many shares? Who cares? Having a lot of shares outstanding isn’t always a bad thing, especially if it’s a sought-after project, but it does make it more difficult for the average investor/speculator to make money, as more buyers are required to move the stock price higher. While there’s no hard or fast rule here, it’s nice to see this number under 70 million.
6. “Our CEO has lots of experience:” Unfortunately, his/her last job was CEO of a tech start up. Bull markets bring opportunists who are drawn in by the sound of flowing money.
7. Impressive potential: People, not potential, move stock prices higher. Beware of promoters who tout how great their project is expected to be while it’s still in its early stages.