When investing in the stock market, there are different quality values, some becoming cumbersome for investors. Los Chicharros are those with a low capitalization level, low liquidity and implicit speculation.
They could be considered as a subsector within the stock market, with well-defined peculiarities that make them hardly identifiable by savers.
For some an opportunity, although an inordinate risk and lack of sanity for others.
Charm for speculators and in general a phenomenon with possibilities for debate in specific situations, although most of the experts have similar opinions.
It can become complex to carry out operations with peas, because the implicit risk is high. Even so, there are investors who like to move at this level, being attractive to them.
Being able to have spectacular rises and pass from hand to hand due to the price instability that they can experience in a short period of time; If they end up in our possession and are not sold at the right time, or if their value falls too low, the damage could be considerable.
There are opinions and arguments against, but equally in favor on the part of critics regarding these values, provoking debate.
We will review in this article characteristics and some interesting elements of this event on the stock market.
Chicharros in the Stock Market - Definition
They are values with the possibility of being easily identified. Small companies listed on the stock markets, which have such low liquidity that they are the target of financial intermediaries and speculators who will have a significant influence on their price quotation.
This is precisely why its evolution is so violent in these markets. Its price volatility is marked above the ordinary, being able to revalue 15%, but still fall devastatingly even higher than this percentage.
It is a security whose capitalization level is markedly low and includes excessive risk. They suffer extremely high fluctuations in their price and therefore will be the object of speculation, easy to manipulate.
They are small or medium-sized companies that, as a result of having little negotiation, tend to suffer significant stock market variations, some having an intense journey on the stock market due to being small and related to new sectors with significant growth potential. Also for skipping scenarios of suspension of payments or improving your income statement. The positive increase in analyst expectations also influences this fact.
It is a type of operation that we could describe as not recommended for conservative investors, but for those with aggressive profiles.
It is referred to disparagingly as chicharros, by analogy to the cheap, low-quality fish that bears this name. Companies that often deserve this name, being involved in continuous economic problems that make their accounts unstable, reflected in their stock prices.
A large company with a low quality business will not be considered a pea, and a small company with a profitable business will not be either.
These types of securities can have majestic rises and multiply their price intensely in a short time. They could also be falling for long periods such as decades.
It is possible to be in a pea for a few months and get to multiply the money 10 times, but you could stay in it for 30 years and lose money substantially.
It is precisely the possibility or opportunity to be successful in achieving extraordinary returns in short times, which attracts many.
The most rational action is possibly to avoid temptation. You could be hitting a raise, many claim, but it is highly likely that more money will be lost on subsequent failed attempts.
It is suggested that even in cases where prices could rise sharply, it is difficult to win, since they could fall as fast or more than they climbed; causing investors who have bought below to see them rise without selling, hoping that they will continue to do so, suddenly assaulting them that they are again at the price they bought, and not infrequently below.
Many consider that the smartest thing to do is stay away from peas and avoid them.
small fish
Considered a chapter of the peas, they have an implicit risk even more accentuated. They could be considered extremely little "liquid", even ceasing to trade, being very dangerous for investors.
They are more volatile than the peas themselves. In a few months they are capable of multiplying their market capitalization by 10 or 15. For all this, they are frequently managed by strongly aggressive investors or who are continually pending market developments.
A poorly managed company is not always a Chicharro
There are small capitalization companies and they are not precisely considered a pea. They can be found to be a profitable business to the point that those who invest in them could be making a convenient investment, especially if they were to grow or be overshadowed by a superior company in the future.
Although chicharros are small capitalization companies, they are still poorly managed companies with significant economic problems.
Due to the fact that a company is being poorly managed, this will not turn it into a pea. If it has a suitably high market capitalization, it will not be considered as such a security.
It is necessary that both characteristics or circumstances coincide. That is, be present a low capitalization and have major economic problems.
Identifying characteristics
In summary and synthesis, we detail some characteristics that will help to identify this type of value.
- They will be small companies, usually with little travel.
- The variations in their prices are overwhelming.
- They have low capitalization, and their liquidity is lower than the other securities listed on the Continuous Market.
- Companies in recession could be considered within this classification.
- Its volatility is exaggerated, with a high price range due to its low trading volume.
- Its price can move with oscillations from 10 - 15%.
- Values with little rotation and narrow.
- They belong to companies with delicate financial situations.
Good for investing or for speculating?
It could be profitable to speculate with peas, although not recommended. In the cases of those investment houses that can move these values with tiny amounts of money, it would be even less advisable.
These are values with the possibility of being easily manipulated. And this question could be noted as another of their identifying characteristics. With few orders and money, it is possible to artificially move the quote.
It is stated that these values are not really suitable to invest, rather ideal for speculating and this if the investor has enough experience to recognize their profit and loss limits.
Inexperienced Investors Trapped
An experienced investor dedicated to speculating with peas will always keep in mind that “today” a specific operation could be super profitable; but that "tomorrow" everything could be lost.
Many investors with limited experience will find themselves trapped in losses as they are lured by promises of quick profits.. They generally focus on the potential benefits and do not adequately reflect on the losses they may incur.
Let's imagine a company that at a certain moment is trading at 0.04 euros. If the price goes back to 0.08 euros, we will be doubling the bet, being able to think that it is only 4 cents without much relevance. As it is difficult to place a stop loss with such low prices, investors without sufficient experience or knowledge stop placing a stop of this type.
By being caught in losses, it will no longer be a speculative operation in itself and will become a long-term investment.
The error begins to multiply exponentially, since these values could be falling for years when they enter a loss dynamic like that, they could never even recover their original price.
For many, speculating with peas is like playing the lottery, even more than an act of speculation itself.
The chicharros are values in which those very aggressive investors delight, not so the conservatives who will very rarely lean towards this type of investment due to the existing insecurity, being aware that they can have significant losses in a few trading sessions.
Very experienced investors are those who might be able to take advantage of this type of securities, although it is necessary to make it clear that it is a risky activity.
It is necessary to buy and sell in a hurry at the time when there is an upward trend, otherwise you will have to keep a value that will not be worth what you paid for it.
If the peas are managed incorrectly, they can become a real ruin, although as in all risks, the probability of success will always be present.
If a company rises vertiginously and later falls at the same rate, even ceasing to be listed, how could it happen; in that case, it is possible to remain trapped in the value until the moment the company proceeds with adequate measures and decisions to recapitalize or sell to a third party.
Although the peas could be revalued strongly, even if there are greater possibilities of obtaining benefits than with the "Blue Chips", there is no doubt that it will be a risky game.