Investing in penny stocks allows traders to increase their profits dramatically. However, you can also lose your trading capital quickly. These tips below will make you more strategically confident and help you lower the risk of one of the riskiest investment vehicles.
A. Companies classified as Penny Stocks are often only worth a little. Investing in the following Microsoft or Home Depot may sound appealing, but the chances of finding a once-in-a-decade success story are slim. These companies often start by purchasing a shell company because it’s cheaper than an IPO or lack a compelling business plan to justify investment banker’s money for an IPO. Although these types of companies are not necessarily bad investments, it is essential to be realistic about what kind of company you are investing in.
B. When looking at trading volumes, it’s essential to look for consistently high shares being traded. Average daily volume can be misleading; for instance, if a company sells five hundred shares a day but won’t trade on the weekdays, what will the daily average of who will appear to be? ______ shares. It would be best to have a consistent volume to get in and out at an acceptable rate of return. Additionally, take note of the total number of trades intraday. Is it one company friend selling or buying? Liquidity should be the first thing to look at, as if there is no volume, you will end up holding “dead money,” where the only way to sell shares is to dump at the bid, putting more selling pressure and an even lower sell price.
C. Determining whether the company knows how to make a profit is essential. While it’s common to see a start-up company run at a loss, it’s important to investigate why they are losing money. Is it manageable? Will they have to seek further financing (which will result in dilution of your shares), or will they have to find a partnership that works for the other company? If your company knows how to make a profit, it can use that money to grow its business, increasing shareholder value. Finding these types of companies may require research, but when you do, you lower the risk of losing your capital and increase the odds of a much higher return.
D. An entry and exit plan is crucial when investing in Penny Stocks. These stocks are volatile and will quickly move up and down just as quickly. Remember that buying a stock at $0.10 and selling it at $0.12 represents a 20% return on your investment. A 2-cent decline will leave you with a 20% loss. Many stocks trade in this range daily. If your investment capital is $30,000, a 20% loss is $6000. Doing this five times means you need more money. It’s essential to keep your stops close. If you get stopped, move on to the next opportunity. The market is telling you something; whether you want to admit it or not, it’s usually best to listen. If you plan to sell at $0.12, and it jumps to $0.13, take the 30% gain or, even better, stop at $0.12.Take your profits while not capping the upside potential.
E. Most people learn about penny stocks through mailing lists. There are many excellent penny stock newsletters, but many are “pumping and dumping.” Insiders will load up on shares and pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. The result is that the insiders win. Only some newsletters are good, and it’s essential to do your research to spot the good from the bad. Subscribe and track the investments. Did the opportunity to make money seem legitimate? Do they have a history record of providing subscribers with great opportunities? You’ll notice quickly whether you have subscribed to a good newsletter. Finally, invest at most 20% of your portfolio in penny stocks. You support the production of wealth and keep the money to make another profitable trade. If you put every penny you have, you will undoubtedly lose your entire portfolio. If that 20% grows, you’ll have more than enough money to make a healthy rate of return. Since penny stocks are already risky, why put your money more at risk?