Investing in penny stocks provides traders with the opportunity to seriously increase their profits nevertheless , it also provides an equal chance to lose your trading capital quickly. These 5 pointers will help you lower the chance of one of the riskiest investing vehicles.
1. Penny Stocks are a penny for a reason.While we all dream about making an investment in the following Microsoft or the subsequent Home Depot, the reality is, the chances of you finding that once in 10 years success story are slim. These companies are either starting out and got a shell company because it was cheaper than an IPO, or they simply don't have a business plan compelling enough to make a case for investment banker’s money for an IPO. This does not make them a bad investment, it should make you be hard-headed about the kind of company you're investing in.
2. Trading VolumesLook for a consistent large volume of shares being traded. Having a look at the average volume can be misleading. If ABC trades 1 million shares today, and does not trade for the remainder of the week, the daily average will seem to be 200 000 shares. To get in and out at an OK rate of return, you need consistent volume. Also look at the number of trades each day. Is it 1 insider selling or purchasing? Liquidity should be the first thing to have a look at. If there is no volume, you may finish up holding “dead money”, where the only possible 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 exceptional to see a start up company run at a complete loss, its crucial to have a look at why they're losing cash. Is it manageable? Will they must seek further financing (resulting in dilution of your shares) or will they should seek a joint partnership that favors the other company?
If your company knows how to turn a profit, the company can use that money to grow their business, which increases stockholder price. You've got to do a little analysis to find these corporations, but when you do, you lower the danger of a loss of your capital, and increase the likelihood of a much higher return.
4. Have an entry and exit plan – and stick to it.Penny stocks are volitile. They will swiftly move up, and move down just as quickly. Remember, if you purchase a stock at $0.10 and sell it at $0.12, that represents a 20% profit on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a regular basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you are 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 wish to accept it or not, its often best to listen.
If your intention 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.
5. How did you find out about the stock?Most folks discover about penny stocks through a mailing list. There are numerous excellent penny share newsletters nonetheless , there are just as many that are pumping and dumping. They, with insiders, will load up on shares, then begin to pump the company to trusting newsletter customers. These subscribers buy while insiders are selling. Guess who wins here.
Not all newsletters are bad. Having worked in the sector for the last 8 years, I have seen my share of sneaky companies and promoters. Some are paid in shares, often in limited shares (an agreement whereby the shares can't be sold for a destined period of time), others in cash.
The proper way to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a valid opportunity to earn money? Do they have a previous record of providing subscribers with wonderful openings? You’ll start to notice swiftly if you have subscribed to a good newsletter or not.
One other tip I'd offer to you isn't to invest more than 20% of your total portfolio in penny stocks and shares. You are investing to make money and preserve capital to battle another battle. If you put way too much of your capital in peril, you increase the odds of losing your capital. If that 20% grows, you’ll have more than sufficient money to make a healthy rate of return. Penny stocks are dodgy to start with, why put. Your cash more in peril?
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