When traders buy penny stocks, they have the chance to make a lot more money quickly. However, they also have the chance to lose all of their trading capital quickly. One of the riskiest ways to invest can be less risky if you follow these five tips.
Penny stocks are only worth one cent for a reason.
We all wish we could invest in the next Microsoft or Home Depot, but the truth is that the chances of you finding that once every 10 years success story are low. These companies are either just starting out and bought a shell company because it was cheaper than an IPO or they don't have a good enough business plan to convince investment bankers to give them money for an IPO. This doesn't make them a bad investment, but it should make you more realistic about the kind of company you're putting your money into.
- Trading Volumes
Look for a high volume of shares being traded all the time. When you look at the average volume, it can lead you astray. If ABC trades 1 million shares today and then doesn't trade for the rest of the week, the daily average will look like 200,000 shares. You need steady volume to get in and out of the market at a good rate of return. Also look at how many trades happen each day. Does the insider buy or sell? The first thing to look at is liquidity. If there is no volume, you will end up with "dead money," which means that the only way to sell shares is to "dump" at the bid, which will increase the pressure to sell and make the sell price even lower.
- Does the business understand how to make money?
It's not unusual for a new business to lose money at first, but it's important to find out why. Is it manageable? Will they have to look for more money, which will make your shares less valuable, or will they have to look for a joint venture that benefits the other company?
If your company knows how to make a profit, it can use that money to grow the business, which increases the value of the shares for its shareholders. You have to do some research to find these companies, but when you do, you lower the chance of losing your money and increase the chances of getting a much higher return.
- Have a plan for getting in and getting out, and stick to it.
Penny stocks go up and down a lot. They will move quickly up and just as quickly down. Keep in mind that if you buy a stock for $0.10 and sell it for $0.12, you made a 20% profit on your investment. If the price goes down by 2 cents, you lose 20 percent. Many stocks trade every day in this range. If you put $10,000 into an investment and lose 20% of that, you lose $2,000. If you do this five times, you will run out of money. Stay close to your stops. If you don't get what you want, move on to the next chance. Even if you don't want to admit it, the market is telling you something, and it's usually best to listen.
If you planned to sell at $0.12 and it goes up to $0.13, you can either take the 30 percent gain or, better yet, set your stop at $0.12. Lock in your profits without putting a limit on how much more you can make.
- Where did you hear about the stock?
Most people learn about penny stocks by signing up for a mailing list. There are a lot of good penny stock newsletters, but there are also a lot of pump-and-dump newsletters. They and other insiders will buy a lot of shares and then start to sell the company to newsletter subscribers who don't know what's going on. These people buy when those in the know are selling. Try to guess who wins.
Newsletters aren't always bad. Since I've been in the business for 8 years, I've seen my fair share of shady companies and promoters. Some people get paid in shares, sometimes in restricted shares (which can't be sold for a certain amount of time), and others get paid in cash.
How can you tell a good company from a bad one? Just sign up and keep track of the investments. Was there a way to make money that was legal? Do they have a history of giving their subscribers great chances? You will soon know if you have signed up for a good newsletter or not.
Another tip I can give you is that you shouldn't put more than 20% of your portfolio in penny stocks. You invest to make money and keep money so you can use it in another battle. If you risk too much of your money, you make it more likely that you will lose it. If that 20% grows, you'll have more than enough money to make a good rate of return. Penny stocks are already risky, so why put more of your money at risk?
