Penny Stocks Investing – Tips For Success

Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, nonetheless, it also provides an equal chance to lose your trading capital quickly. These 5 tips will assist you lower the risk of one or more of the riskiest investment vehicles.

1. Penny Stocks are a penny for a contributing factor.
While we all dream about investing in the next Microsoft or the next Home Depot, the facts are, the odds of you discovering that once in a decade success story are slim. These firms are either commencing and purchased a shell company as it was less expensive than an IPO, or they just don’t have a company plan compelling enough to justify investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should get you to be realistic about the sort of company that you are investing in.

2. Trading Volumes
Look for 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 remainder of the week, the daily average will seem to be 200 000 shares. As a way to enter and out at an acceptable rate of return, you need consistent volume. Also view the amount of trades per day. Is it 1 insider selling or buying? Liquidity ought to be the first thing to consider. If there is no volume, you will end up holding "dead money", where the only method of selling shares is to dump at the bid, which will put more selling pressure, leading to an even lower sell price.

3. Does the business know the way to make a profit?
While its not unusual to see a start up company run at a loss, its important to investigate why they are falling in value. Is it manageable? Will they have to seek further financing ( resulting in dilution of your shares) or will they have to search out a joint partnership that favors the other company?

If your company knows how to make a profit, the firm can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, however when you do, you lower the chance 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 quick move up, and move down just as speedily. Remember, if you purchase a standard at $0.10 and sell it at $0.12, that represents a 20% return of investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade 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 income. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you would like to acknowledge it or not, its usually best to listen.

If your plan was to trade 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 establish about the stock?
Most people find out about penny stocks through a mailing list. The’re many excellent penny stock newsletters, although, the’re just as many who are pumping and dumping. They, along with insiders, will load up on shares, then set out to pump the firm to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.

Not all newsletters are bad. Having worked in the profession for the last 8 years, I have observed my share of unscrupulous businesses and promoters. Some are paid in shares, often times in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.

How to pick out the good firms from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to earn an income? Do they have a history of providing subscribers with great opportunities? You’ll start to notice speedily if you’ve subscribed to a good newsletter or not.

One other tip I would offer to you is not to invest more than 20% of your general portfolio in penny stocks. You are investing to earn money and preserve capital to fight another battle. If you place 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 nutritious rate of return. Penny stocks are risky for starters, why put your income more at risk?

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