The importance of staying within your tolerance for risk.....

Investors could lose some or all of their investment.

How often have you gone onto a website promoting an investment vehicle and found a disclaiming statement like the one above?  If the answer is never, then you're probably not looking very hard, its pretty much standard boiler plate.  You see this type of disclaimer all the time on promotional sites for companies in the development stage, selling shares to finance business operations while they attempt to achieve sufficient revenue to fund the business.  Of course its usually in a small font, and often requires hitting an embedded link to find it.  

Risk tolerance is of vital importance when investing.

How often have you looked at a stock that's gone from 10 cents to $1.00 and thought:  "If I'd put $10,000 into that stock at a dime I'd have $100,000 now".  But how many people have $10,000 lying around that they can afford to lose?  Would losing $10,000 put you in danger of missing a mortgage or rent payment?  Would the family vacation have to be canceled?  

These are important questions to ask.  

More than anything else psychology rules the market from where I sit.  And when people put money at risk that they can't afford to lose, the results can be disastrous.  If you have say $1,000 that you don't need, that is to say that its money you could lose and not have it impact your life in any way, shape or form, that is what I call "risk capital".  Putting that money in play in a high risk, high reward penny stock, it could very well lead to some very nice gains.

$500 invested in a 10 cent penny stock that goes to $1.00 and is then sold will result in a gain of $4,500....a 900% return.  Turning $500 into $5,000 is nothing to sneeze at.  If someone walked up and handed you fifty $100 bills....Would you tell them to get lost?  I don't think so.

The problem is $5,000 in today's day and age....its not a lot of money.  And that's where people get into trouble, especially with speculative stocks.  And its not just OTC penny stocks either, it can happen with companies with shares listed on more senior exchanges as well.  There are plenty of Nasdaq and TSX listed stocks that have been around for ten or twenty years....and more, that have never achieved positive cash flow from business operations.  That's why they hire stock promoters to attract investors.  

Staying within your tolerance for risk, only investing money that you don't need, I would argue that it will lead to making better and less emotionally driven decisions.  

Let's say you have $1,000 in risk capital, we'll call it "mad money" and you decide to invest it in a 10 cent stock. If that stock goes to 20 cents...then you've turned it into $2,000 if you sell.  Maybe after you sell the stock will continue to climb to $1.00.  Oh well, too bad so sad....cry into the $1,000 you made in profits.  

But if you'd invested $10,000 and it was money that was needed for the mortgage, rent, vacation, or any other planned or required expense.  Now if you sell at 20 cents you've turned $10,000 into $20,000....But if the stock keeps climbing are you going to be able to leave it alone, or are you going to believe the forecasters touting a $2.00 price target and put it back at risk by buying back in.

Greed is a powerful emotion, perhaps even more powerful than fear.  Many people can control or stifle their fear, but are incapable of harnessing their greed.  Remember the movie "Wall Street" and the 'Greed is Good' speech?

Its the same old mantra I keep repeating over and over on this blog.  Nobody ever went broke by taking profits.  Remember that disclaimer right at the top.  If you're dealing with any stock, but especially with a speculative development stage company that has never achieved profits, then my advice is to be very careful and that any profit is good profit.  And if you're holding a stock that's moved up, but you haven't sold it...then your profit is $0.00 nada, nothing.  Just as a loss doesn't become real until you sell, the same holds true with profits.

Good luck and I hope this blog is helping retail investors make $$$.