Stock Market Tips 3

Rule 3: Don't buy stocks in closely held companies

Whether a company is widely held or closely held depends upon the number of stockholders it has. Companies with less than 5,000 stockholders will be considered as closely held.

Stocks of closely held companies tend to be less active than those of widely held ones since they have a fewer number of stockholders and, thus, a smaller floating stock of stocks. Stocks of' such companies tend to be ignored by the general public. Large institutional investors also tend to avoid closely held companies. As a result their stocks do not get sufficient price support, which they would otherwise have got if they had been widely held. Moreover, it is always much easier to manipulate the stock prices of a closely held company than those of a widely held one.

Stock prices of closely held companies also tend to be more volatile than others. When they rise they rise very fast, and to a very high level. Conversely, when they fall they do so very fast and to a very low level. As a result, it is generally very difficult to buy stocks in a closely held company when prices are rising, and very difficult to sell them when prices are falling. Investing in such stocks requires a high degree of expertise, knowledge, alertness and quick thinking which take years of active investing to acquire. We would, therefore, strongly urge you to keep away from such stocks.