Risks of Holding Low Quality Stocks Overnight

There are many risks of holding low quality stocks overnight and a recent example caught my eye which I'll be going over below.

First of all, if someone is primarily a scalper or day trader, then these risks may not affect them ...(in most cases) as these types of traders typcially close any open positions prior to the close of the trading session each day.

But... there are instances when a scalper or day trader finds a stock in what he/she determines may have potential for a longer term position such as swing trading. In a case like this, the risks of holding low quality stocks overnight comes into play almost unconsciously.

When mentioning "low quality" stocks, we're referring to stocks of companies that do not have a long term track record of proving themselves worthy to be considered "quality" and low risk. These companies typcially have problems managing their debt, accounting irregularities or inconsistencies, borrow large amounts of money to keep in business, have a low stock price for long periods of time and never breaking out, etc.

This is opposed to a "quality" stock of a company that produces consistent profits, rewards shareholders, manages their debt well and typcially has an increasing stock price over the long term and definitely during bull markets.

One sure sign of a "low quality" stock is one which remains flat or declines during times when the overall market increases. The example below is one such stock.

For this example we'll be taking a look at Beacon Power Corporation (Ticker Symbol: BCON). I used to scalp and day trade BCON a few years ago when their were several hurricanes that hit the United States. BCON was one of those stocks that caught the attention of intraday traders and the stock had lots of volatility. But, I always closed my position prior to the end of the day (from what I remember...).

Beacon Power Corporation works towards helping provide power during outages through the use of backup power and energy storage.

BCON caught my eye recently because 1) I was familiar with the symbol having traded it extensively in the past and 2) On Sunday they announced they had filed for bankruptcy!

After I researched further, I read that the company had received a $43 million loan guarantee from a controversial U.S. Department of Energy program less than 1 year ago. Here's the news release: Beacon Power Files Bankruptcy

BCON had been trading below $1.00 per share since August, 2011 and recently received a de-listing notice. On Friday before the bankruptcy filing news, BCON closed the day trading at $0.45 per share. Monday, the stock opened at $0.12, closed at $0.11 and Tuesday BCON closed at $0.09.

Without knowing about the bankruptcy filing and knowing that BCON was once a high flier that attracted lots of intraday and day-to-day trading activity, many traders and investors may have had overnight positions in this stock. Energy company, backup energy at that, a large governement loan guarantee AND trading around $0.50 per share which attracts a particular type of trader/investor who seeks out low priced penny stocks that have the potential to rebound to previous levels (a bottom fisher).

You'll also see in the chart below that BCON actually looked like it put a potentially "nice" bottom formation in recently, tempting additional people.

One of the problem's here is that BCON started the year on January 3, 2011 at $2.20 per share and has been trending lower ever since. Hardly a "quality" stock to select in an overnight position.

Another problem: trading under $1.00 as a Nasdaq stock since August, 2011. Another sign of a "low quality" stock. There's more about this stock and additional lessons to be learned but I'll write about them in other articles to keep this one as brief as possible...

The take away lesson here is that make sure you thoroughly research any companies that you intend on holding stocks in overnight. A certain amount of research is generally necessary for stocks you intend to scalp or day trade but overnight positions require a considerable amount more in ALL cases.

Here's a 1 year chart of BCON to catch your attention and try and help remind you of the risks of holding low quality stocks overnight:

Risks of Holding Low Quality Stocks Overnight

There are always risks associated with trading and investing in ANY stocks but the risks of holding low quality stocks overnight are far greater than those that come with quality stocks.




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