In order to trade stocks successfully - especially small caps - you need to understand the basic life-cycle of a winning stock.  You’d be surprised at how many investors and speculators email me asking if a certain stock they own is going to go up. 

The short answer is, I don't know!  But since "I don't know" is not a very helpful answer, I'd find myself explaining to them the 6 stages.  After repeating myself at least a hundred times, I figured it's much easier just to post it here...

Once you've read this article to the end, you'll be equipped with an understanding that very few investors take advantage of.  And hopefully, you'll be able to turn a good profit on your future investments. 

Stage 1:

A move begins with the sponsors (smart traders) who have insider knowledge as it relates to a particular stock or market. This information will move a market up or down depending on the insiders’ information. These buyers are smart, very smart, and recognize trading/investment opportunities very early in the price advance.

Stage 2:

Days, weeks, or sometimes months after a move has started, there is a brief mention in the electronic media (radio, cable, TV) or on one of the internet chat boards that a market has moved. The public hears for the first time and begins to get interested, but does not buy.

Stage 3:

A blurb of information appears in print media. The move also begins getting more exposure on blogs and internet message boards. The public starts paying a little more attention, and will buy a little bit.

Stage 4:

Wall Street and LaSalle Street brokers go into full hype mode and hawk the market to their customers. The public begins buying in greater volume.

Stage 5:

A full-blown front-page article appears about the particular stock or market in one of the major financial newspapers, magazines, or financial websites. This is often six months to a year after the fact and after a market has shown its greatest appreciation. There is often heavy public buying, even a possible frenzy, as all media, brokers, and so-called “gurus” start to tout the market.

Stage 6:

As step 5 gets underway, the sponsors or smart traders begin to move out of the market and take their profits off the table.

The finale: The move ends, the market falls, and all those late-to-the-party investors lose money.

Of course, not all stocks go through this cycle.  But this gives you the basic idea of the stages that a stock can go through when it’s on its way up.  You now understand a little more about the risk involved at each successive stage and can evaluate your investment accordingly.  

Ironically, those that get in at the end of this life cycle tend to believe they are the ones taking on the least amount of risk.  But now that you understand this simple life-cycle you’ll be much more prepared than 99.9% of the other stock traders out there. 

Remember, whenever you make an investment there is always going to be a risk.  You just have to find out the sweet spot that works for you. And always do your due diligence before any trade.  

- Max