We send alerts because small-cap momentum is real and profitable to catch. We also send them knowing that most people who trade these names lose money, usually because they skip the homework and chase the headline instead. This page is the candid version of that risk, plus a checklist for doing the homework yourself.
Small and micro-cap stocks routinely move 20%, 50%, even 100% or more in a single session, in either direction. That range is the entire appeal of momentum trading and its entire danger. A stock that gaps up 80% before the open can just as easily give back the whole move by lunch. There is no floor built into the price action, and liquidity thins out fast once a move stalls, which is exactly when you need to exit.
Many small-cap companies fund operations by issuing new shares rather than generating cash from the business itself. At-the-market offerings, equity lines of credit, warrants, and convertible notes all let a company sell stock directly into a rally, sometimes without much public notice until the share count shows up in the next filing. A jump in shares outstanding can erase a price gain even when the stock itself hasn't moved, because your slice of the company just got smaller. Check the most recent 10-Q or 10-K for the current share count and compare it against prior filings before assuming a move is "real."
A stock can look tradable on a chart and still be nearly impossible to exit in size. Average daily volume on quiet days can be a fraction of what it is during a spike, meaning the bid-ask spread widens and your own selling can move the price against you. Never assume you can get out at the last printed price. Size your position for the volume you'd see on an ordinary day, not the volume during the move that got your attention.
Some small-cap moves are driven by paid stock promotion rather than organic demand. A third party (sometimes the company itself, sometimes a separate promoter) pays for coverage designed to generate buying interest, and once that paid attention fades, so does the volume holding the price up. Compensated coverage isn't automatically fraudulent, and companies are allowed to pay for legitimate awareness campaigns, but it is not neutral research, and Section 17(b) of the Securities Act requires it to be disclosed. Read every disclosure you're given, on our alerts and anyone else's, and weigh the source accordingly.
None of this is a reason to avoid small-caps. It's a reason to trade them with your eyes open, size positions you can afford to lose entirely, and never treat an alert, ours or anyone's, as a substitute for your own research.
For definitions of the terms used throughout this checklist, see our Glossary. Full legal language on how we operate lives in our Disclaimer and Compensation Disclosure.