Making an investment in penny stocks provides traders with the chance to significantly increase their profits nevertheless, it also provides an equal chance to lose your trading capital fast. These five tips will help you lower the danger of one of the most chancy investment autos.
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 the simple way to earn a profit, the company can use that cash to grow their business, which increases stockholder value. You have got to perform some research to find these corporations, but when you do, you lower the chance of a loss of your capital, and increase the likelihood of a far higher return.
4. Have an exit and entry plan - and stick to it. Penny stocks are volitile. They may quickly move up, and move down just as fast. Remember, if you purchase a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A two cent decline leaves you with a twenty percent loss. Many stocks trade in this range on a regular basis. If your investment funds is $10 000, a twenty p.c. loss is a $2000 loss. Do this five times and you are out of cash. Keep your stops close. If you get stopped out, move on to the subsequent opportunity. The market is letting you know something, and whether you need to fess up or not, its customarily best to listen.
If your scheme was to sell at $0.12 and it jumps to $0.13, either take the thirty percent 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.
The easy way to spot the good firms from the bad? Simply subscribe, and track the investments. Was there a valid opportunity to earn income? Have they got a previous record of providing customers with wonderful opportunities? You may begin 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 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 the simple way to earn a profit, the company can use that cash to grow their business, which increases stockholder value. You have got to perform some research to find these corporations, but when you do, you lower the chance of a loss of your capital, and increase the likelihood of a far higher return.
4. Have an exit and entry plan - and stick to it. Penny stocks are volitile. They may quickly move up, and move down just as fast. Remember, if you purchase a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A two cent decline leaves you with a twenty percent loss. Many stocks trade in this range on a regular basis. If your investment funds is $10 000, a twenty p.c. loss is a $2000 loss. Do this five times and you are out of cash. Keep your stops close. If you get stopped out, move on to the subsequent opportunity. The market is letting you know something, and whether you need to fess up or not, its customarily best to listen.
If your scheme was to sell at $0.12 and it jumps to $0.13, either take the thirty percent 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.
The easy way to spot the good firms from the bad? Simply subscribe, and track the investments. Was there a valid opportunity to earn income? Have they got a previous record of providing customers with wonderful opportunities? You may begin 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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