Penny stock trading is not for the faint of heart or the unprepared. If penny stocks are anything, they are extremely volatile. On the other side of that coin, they can be amazingly profitable if you know how to manage high risk. It’s all a matter of knowing what you are doing.
Penny stocks are very similar to standard stocks other than the fact that they are not traded on the major stock exchanges. Penny stocks are, by definition, stocks that are trading at or below five dollars a share. The purpose of trading these stocks is just the same as regular stocks: Try to buy low and then sell high.
Penny stocks are a lot more volatile than standard stocks and this is both their significant advantage AND their foremost disadvantage. These stocks are known to double their value in only one day whereas it could take weeks, months, or even years for a normal stock to do likewise.
The truth is it is a lot easier for a stock priced at a penny per share to increase its worth to two pennies per share than it is for a stock worth thirty dollars a share to double its price to sixty dollars a share.
How all of this impacts the penny stock investor is a good news/bad news type of thing. Bad news first: Penny stocks can be so volatile that you are able to lose your total investment in no more than a single trading day.
It’s not remarkable for a stock worth a penny a share to go to zero quickly. Normal stocks are able to also go to zero but they will spend a much longer period doing it, offering the investor a chance to sell his or her position and hold onto a portion of his or her capital.
You can rapidly be blind-sided by penny stocks if you are not watching closely with your finger ready on the sell trigger. These stocks don’t always perform as you would guess after investigating the books of a company. In the universe of penny stocks, one often sees good companies going down and bad companies going up.
The good news? You are able to make a gigantic percentage increase quickly with only a conservative amount of capital at risk. And, while you can lose nearly all or all of your capital quickly, you won’t be injured that much if you have only involved a small part of your entire net worth.
Obviously, investing just a penny today and then having two pennies tomorrow is not apt to change your life that much, so you may be tempted to try to double a much more sizeable initial investment. Because of the volatility of these stocks, you should never put in more than you can afford to lose.
How, then, can you put the odds in your favor? It’s all about selecting the perfect penny stock and you may want some help there. Use professional stock picks from a reliable stock-picking service for a start. Make a list of the 10 best penny stocks from the stock picking service and then do your own research. List these ten stocks on a spreadsheet and make columns for company earnings, book value, and such.
As said above, penny stocks do not continually work out as you might guess from the company books but most of the time they do, therefore going through the above exercise is not without value. Listing the 10 stocks on a spreadsheet helps you see easily which one of them is most likely going to be a winner.
After placing your buy order, keep a journal of the exact outcomes of all 10 stocks, including the ones you decided not to buy. This will be a wonderful learning exercise for you.
Profit from your past mistakes. Try to understand what went wrong and why. Don’t commit the same errors again. Observe what other investors are doing and learn from their ups and downs. If the price of a stock is low, plan to find out if it is because it has not yet been discovered or if, rather, the corporation is in financial trouble. Buy the first never the second.
If it happens that you have a sizeable win of one hundred percent or more, it’s time to sell all or a portion of your holding in that penny stock. There are a few ways to achieve this. You could sell fifty percent of your shares and let the other half ride or, as an alternative, you would leave 1/3 in, sell 1/3 for cash in your pocket, and then invest the dollar amount of the final third in another, different, penny stock.
Don’t get greedy and hang onto a stock past its time. What goes up must come down and penny stocks usually do that quickly.
If the stock keeps ascending after you have dumped it, don’t worry about it. There will be another train leaving the station in five minutes. The whole idea is to buy under-valued issues and then sell them before they become over-valued.
Never buy or get rid of it for emotional reasons. Habitually go by the numbers and stay on your plan.
Finally, be careful about hot penny stock tips from promoters. Promoters buy a penny stock and then try to prevail on everyone else in the world to buy the same penny stock, thus driving the price up. Since they made their acquisition before you did, they will make a 100% gain or more before you can really profit and will then dump the stock like a hot potato causing an immediate and unexpected decline in share value at your expense.
ABOUT THE AUTHOR: Bob Gillespie. © 2011 Robert M. Gillespie, Jr.