Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles.
1. Penny Stocks are a penny for a reason. While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker's money for an IPO. This doesn't make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.
2. Trading Volumes Look for a consistent large volume of shares being traded. Taking a look at the average volume can be deceiving. If ABC trades 1,000,000 shares today, and does not trade for the remainder of the week, the daily average will seem to be two hundred 000 shares. To get out and in at an OK rate of return, you want consistent volume. Also glance at the number of trades each day. Is it one insider selling or buying? Liquidity should be the very first thing to take a look at. If there is not any volume, you may finish up holding "dead money", where the only possible way of selling shares is to dump at the bid, which should put more selling pressure, leading to an even lower sell price.
3. Does the company understand how to earn a profit? While it is not uncommon to see a start up company run at a total loss, its critical to take a look at why they're losing money. Is it controllable? Will they must seek further financing ( leading to dilution of your stock ) or will they must look for a joint partnership that favors the other company?
If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.
4. Have an entry and exit plan - and stick to it. Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.
If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.
5. How did you find out about the stock? Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.
Not all newsletters are bad. Having worked in the business for the last eight years, I've seen my share of underhand corporations and promoters. Some are paid in shares, infrequently in restricted shares ( a deal whereby the shares can't be sold for a destined time period ), others in readies.
How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities? You'll start to notice quickly if you have subscribed to a good newsletter or not.
One other tip I might offer to you isn't to invest more than twenty p.c. of your general portfolio in penny stocks. You are investing to earn money and preserve capital to battle another battle. If you put far too much of your capital in peril, you increase the chances of losing your capital. If that twenty p.c. grows, you may have more than needed money to make a good rate of return. Penny stocks are dodgy to start with, why put your cash more in danger?
1. Penny Stocks are a penny for a reason. While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker's money for an IPO. This doesn't make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.
2. Trading Volumes Look for a consistent large volume of shares being traded. Taking a look at the average volume can be deceiving. If ABC trades 1,000,000 shares today, and does not trade for the remainder of the week, the daily average will seem to be two hundred 000 shares. To get out and in at an OK rate of return, you want consistent volume. Also glance at the number of trades each day. Is it one insider selling or buying? Liquidity should be the very first thing to take a look at. If there is not any volume, you may finish up holding "dead money", where the only possible way of selling shares is to dump at the bid, which should put more selling pressure, leading to an even lower sell price.
3. Does the company understand how to earn a profit? While it is not uncommon to see a start up company run at a total loss, its critical to take a look at why they're losing money. Is it controllable? Will they must seek further financing ( leading to dilution of your stock ) or will they must look for a joint partnership that favors the other company?
If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.
4. Have an entry and exit plan - and stick to it. Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.
If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.
5. How did you find out about the stock? Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.
Not all newsletters are bad. Having worked in the business for the last eight years, I've seen my share of underhand corporations and promoters. Some are paid in shares, infrequently in restricted shares ( a deal whereby the shares can't be sold for a destined time period ), others in readies.
How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities? You'll start to notice quickly if you have subscribed to a good newsletter or not.
One other tip I might offer to you isn't to invest more than twenty p.c. of your general portfolio in penny stocks. You are investing to earn money and preserve capital to battle another battle. If you put far too much of your capital in peril, you increase the chances of losing your capital. If that twenty p.c. grows, you may have more than needed money to make a good rate of return. Penny stocks are dodgy to start with, why put your cash more in danger?
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