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 high volume of shares
being traded. Looking at the average volume can be misleading.
If ABC trades 1 million shares today, and doesn't trade for the
rest of the week, the daily average will appear to be 200 000
shares. In order to get in and out at an acceptable rate of
return, you need consistent volume. Also look at the number of
trades per day. Is it 1 insider selling or buying? Liquidity
should be the first thing to look at. If there is no volume, you
will end up holding "dead money", where the only way of selling
shares is to dump at the bid, which will put more selling
pressure, resulting in an even lower sell price.
3. Does the company know how to make a profit? While its not
unusual to see a start up company run at a loss, its important
to look at why they are losing money. Is it manageable? Will
they have to seek further financing (resulting in dilution of
your shares) or will they have to seek 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 industry for
the last 8 years, I have seen my share of unscrupulous companies
and promoters. Some are paid in shares, sometimes in restricted
shares (an agreement whereby the shares cannot be sold for a
predetermined period of time), others in cash.
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 would offer to you is not to invest more than
20% of your overall portfolio in penny stocks. You are investing
to make money and preserve capital to fight another battle. If
you put too much of your capital at risk, you increase the odds
of losing your capital. If that 20% grows, you'll have more than
enough money to make a healthy rate of return. Penny stocks are
risky to begin with, why put your money more at risk?
About the author:
Trading Penny Stocks |
investment strategies for penny stocks 1source4stocks.com
provides penny stock traders with online trading and investment
tips, online trading strategies and penny stock picks.
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