Investing in Penny stocks |
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Investing in Penny stocksPenny Stocks are a penny for a reason. While we all dream of investing in the next Microsoft or the Home Depot, the truth is the chances of recovering after a decade of success are slim. These companies are either beginner and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan sufficient to justify the investment banker's money for an IPO. This does not make a bad investment, but you should be realistic about the type of company you invest in. Trading Volumes Find a steady high volume of shares traded. In view of the average volume may be misleading. If ABC trades 1 million shares today, and does not trade for the rest of the week, the daily average is displayed on 200000 shares. In order to obtain and an acceptable rate of return, you need constant volume. Always look at the number of trades per day. Is it 1 insider to sell or buy? Liquidity should be the first thing to watch. If there is no volume, you end up holding "dead money", where the only way to sell 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 it's not unusual to see a start up company run at a loss, it's important to consider why they lose money. Is it manageable? Will they have to seek other funding (resulting in dilution of your shares), or will they have to seek a partnership that favors the other company? If your company knows how to make a profit, the company can use this money to expand their business, increasing shareholder value. You need to do some research to find these companies, but when you do; you reduce the risk of losing your capital, and increase the chances of a much higher return. Have an entry and exit plan - and stick to it. Penny stocks are volatile. The value of penny stocks moves up quickly, and moves down just as quickly. Remember, if you buy a stock at $ 0.10 and sell at $ 0.12 that shows 20% return on your investment. A decrease of 2 cents leaves you with a loss of 20%. Many stocks trade in this range on a daily basis. If your capital investment is $ 10,000, a 20% loss is a loss of $ 2,000. If the loss continues for 5 times, then 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 if you want to admit it or not, it's usually best to listen. If your plan is to sell at $0.13 and it increase to $0.14 either take the gain of 40% or better yet, place your stop at $0.13. Lock in your profits without capping the upside potential. How did you find out about the stock? Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash. Not all penny stock newsletters are bad. How to identify good companies from the bad? Just register to the online newsletter service and track the investments. Is there a legitimate chance to make profits? Do the newsletters have a track record of providing subscribers with great opportunities? You'll come to know quickly if you have registered a good newsletter service or not. Another trick, it is recommended not to invest more than 20% of your overall portfolio in penny stocks. You invest to make money and preserve capital to fight against another battle. If you put too much of your capital at risk, you increase the chances of losing your capital. If your investment makes a growth of 20%, you have more than enough money to get a good rate of return. Investing in Penny stocks are risky to begin with, why put your money more at risk? |
Investing in Penny stocks
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