Del Mar 4/1/2010 12:16:41 AM
5 Tips for Investing in Penny Stocks
Del Mar, 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. Do your research.
These companies are either starting out or they do not have enough investment. This doesn't make them a bad investment, but it it means you have to do your research. This will ensure that you are investing in a company that is more likely to give you a return on your investment.
2. Sign up to a penny stocks newsletters
Signing up to a penny stocks newsletter will keep you ahead of the game. It will make your life easier as all the research will have been done for you. However make sure you are subscribing to a reliable source. Try stocksource.us where once you sign up you will receive free emails and top tips on investing and hot penny stocks. The company offers a strict 100% no spam policy so you won’t get bombarded.
3. 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.
4. 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.
5. 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.
