100’s or 1000’s of %, how?

It makes sense why this is a commonly asked question. Why is it when a blue-chip stock gives you a 10% return in a year, that a low-priced junk stock can offer you hundreds, if not thousands of percent in a short amount of time. More importantly, how can you prepare for them?

It normally comes down to 5 explanations. 

1. It’s a fundamentally sound company that is so undervalued that it deserves to move this percentage point to be valued at the market cap it actually resembles (rare).
2. The company is acquired by another industry giant, and the share price agreed upon causes the stock to jump (common, but hard to prepare for).
3. Illegal and enforceable insider trading without the proper registration procedures placed in effect (common and hard to prepare for).
4. The company is pumping its own stock price (pump & dump) through stock promotion and other shady maneuvers for insiders to either sell their shares, or some other frenzy scheme (common and can be prepared for).
5. The stock has so many anti-believers in it for typically valid reasons, that the float has a lot of short sellers in it. When the company owning the stock releases a PR or some catalyst that causes buyers and institutions to buy up the stock, the shorts are forced to cover by becoming buyers, and the major buying momentum forces the stock price to spike nowhere but upwards (common and can be prepared for).

Ultimately as a beginner, you have to study and educate yourself about the in-efficiencies in the market which cause major price fluctuations to the upside and downside. These in-efficiencies gives you the data sets to produce your own qualitative analysis to form what is a “trading thesis” or as the pros say, “trading idea.” Then you transpose that trading idea onto the stock and navigate around it depending on if it turns into a positive trading idea or a negative trading idea. Yes, you can come out of a losing trade by knowing how to navigate the price action. Of course, this requires education and discipline.

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