Penny Stock Investing always grabs peoples dreams of instant wealth for no cost because of their name – Penny Stocks. But just what are the pitfalls of these enticing stocks and how do you avoid the painful lessons many will suffer?
Big time stock traders and investors have played by the rules and started out small, or even very small, swearing by a defined set of rules that basically state they will not continue any cycle of failing that loses them money, over and over.
Losing money instead of learning these rules is something that is unacceptable and potentially crippling to a new investor – even though your brain is trying to tell you that “Heck, it doesn’t matter, they’re only Penny Stocks after all!” (Damn you brain!!)
However, follow a few simple rules and you should be ahead of the penny stock investing game.
Number One and MOST important – Never, ever, under any circumstance borrow money to invest; this is possibly the biggest rule to stay out of investment trouble.
Yes, I know! You think you have the upper hand with some “inside” information that could help you build a huge portfolio in no time!
So have thousands of others before you – and they were all WRONG!
Please, don’t jump on a story with the only answer being borrowing money. If you start to lose money on the stock market, then the debt repayment will come directly out of your pocket. If this happens, trust me – you are now in big trouble.
Even if you begin to make money then you will be spending it to repay the loan instead of saving or reinvesting the funds. This money will stand by and haunt you as you continue to try to make a living off of the stocks you are trading.
Always save up to be able to invest as a rule of thumb, debt will be chased until you finally catch up by being farther behind than you were to begin with.
DON’T DO IT!
Investing in profitable companies is a big rule to keep in mind when investing in penny stocks. I know that reads and sounds awfully silly and a waste of breath but believe me – sometimes people simply invest in a company without determining if the company is profitable or not.
Either they like the name itself – or the product / service the company offers – or even they know a cousin of the manager of the typing pool and reckon it’s keeping it in the family!
Don’t be the sucker that buys a stock and then tunes in to the television or logs on to the internet to see that its quarterly earnings are down and its revenue per share is dropping like a four-ton boulder of the Empire State building – very hard and very fast!).
Find information on how to find a profitable company, it is readily available on the internet, and then determine which company to invest in. Guides for how to evaluate companies, their accounts declarations and markets are readily available.
Also, do all of your homework, research and analysis before you buy a stock that is not garnering any type of attention.
One of the most important things for investors to look at is volume, anything less than one million shares per day is not worth touching. It is a pointless task to purchase a stock that is trading 9,000 shares a day because it will be nearly impossible to sell once you are ready to do so.
Stocks need attention to have liquidity, which basically means that for it to sell it must have value. Don’t be stuck with a rising stock that you will be unable to sell later. Don’t just think of all the lovely profit you’ll generate – think about the mechanics of actually being able to realize that profit. After all – so what if you’ve made $1.20 per share in three months – if you can’t actually sell them!
5 More Tips for Investing in Penny Stocks
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.
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.
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.
Have an entry and exit plan – and stick to it.
Penny stocks are volatile. 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.
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.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.
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