Trading penny stocks offer investors the chance to significantly boost their profits, but it also offers the chance to rapidly lose their trading cash. You may reduce the risk associated with one of the riskiest investment vehicles by following these 5 guidelines.
1. Why are penny stocks only one penny?
The likelihood of discovering that once-in-a-decade success story is low, despite the fact that we all fantasize about investing in the next Microsoft or the next Home Depot. These businesses either lack a convincing business strategy to convince investment bankers to invest in them for an IPO, or they are just starting out and chose to buy a shell company because it was less expensive than an IPO. They are still a good investment, but you should be realistic about the type of business you are backing.
2. Market Volumes
Keep an eye out for a regular high volume of shares being traded. Average volume measurements can be deceptive. The daily average will look to be 200 000 shares if ABC trades 1 million shares today but doesn’t trade the rest of the week. You require constant volume to enter and exit at a reasonable rate of return. Take a look at the daily trade volume as well. Is one insider buying or selling? The initial thing to consider should be liquidity. Without volume, you would find yourself holding “dead money,” where the only option to sell shares is to dump them at the bid, increasing selling pressure and lowering the sale price.
3. Does the business understand how to turn a profit?
While it is common for new businesses to operate at a loss, it is crucial to understand why. Is it controllable? Will they have to look for further funding, which would dilute your shares, or will they have to look for a joint venture that benefits the other company?
If your organization understands how to turn a profit, it may utilize that cash to expand, which raises shareholder value. Finding these businesses requires some investigation, but doing so lowers your risk of capital loss and raises your chances of seeing a far greater return.
4. Have a strategy for entering and leaving, then follow it.
Penny stocks are highly erratic. They will climb swiftly and descend just as quickly. Keep in mind that if you purchase a stock at $0.10 and sell it at $0.12, you will have earned 20% of your original investment. You lose 20% of your investment with a 2-cent fall. On a daily basis, several equities fluctuate in this area. If your initial investment was $10,000, a 20% loss would equal a $2000 loss. After five repetitions, your money is gone. Be sure to quit quickly. If you run into trouble, move on to the next chance. Whether you like to accept it or not, the market is trying to tell you something, and it’s typically best to pay attention.
If you had intended to sell at $0.12 but it increased to $0.13 instead, you could either take the 30% gain or, better yet, set your stop at $0.12. Don’t cap the upside potential while locking in your earnings.
5. How were you made aware of the stock?
The majority of people learn about penny stocks from a mailing list. There are numerous top-notch penny stock newsletters, but there are also many pump-and-dump operators. Along with insiders, they will stock up on shares and start pitching the business to unwary newsletter subscribers. When insiders are selling, these subscribers are buying. Who benefits here?
Not every newsletter is a poor one. I’ve worked in the industry for the previous 8 years, and throughout that time I’ve encountered my fair share of dubious businesses and promoters. Some receive cash payments while others receive restricted shares, which are shares that cannot be sold for a set length of time.
How can you tell excellent businesses from the bad? Just subscribe and keep an eye on your money. Was there a chance to earn money that was legitimate? Do they have a history of offering their customers fantastic opportunities? If you’ve signed up for a quality newsletter or not, you’ll start to notice it right away.
I would also advise you not to allocate more than 20% of your total portfolio to penny stocks. You invest to generate income and conserve capital for a future conflict. You enhance your chances of losing your capital if you risk an excessive amount of it. You’ll have more than enough money to earn a healthy rate of return if that 20% increases. Why put your money in more danger when penny stocks are already a risky investment?