Ways to invest in penny stocks is a very different ball game.
As the name indicates, these are very low priced options.
Often it is the biggest concern and lure about these stocks.
That is what makes trading in these stocks tricky.
This is why many beginners who start with these penny stocks end up in deep losses.
A new investor can easily get hooked to these under $1 counters.
Given the low share price, you can easily buy a large number of shares.
The promise of huge profit on a good trade is what keeps them going.
Given the low price and huge quantity, even a few cents can make a big difference.
But the problem is to know how to handle these.
This is because these are very risky and speculative counters as well.
These are also very non-liquid (thin) counters with very small market caps.
This makes these counters extremely easy target for speculation.
Therefore, screening for these counters can be extremely tricky.
You have to take into consideration a variety of filters.
That alone can guarantee a relatively safe and profitable trading experience.
That said, you cannot compare trading in large caps and small caps in the same parameter.
There are series of subtle differences, and the odds are inevitably against you.
Therefore, you have to base your trade on the parameters of strategy and trading sense.
When you look at how to invest in penny stocks, you need lessons to manipulate scammers too.
This is one of the biggest risks if you want to invest in penny stocks.
Often the entire strategy needs to be geared to this primary concept.
Only that can help in bringing about long-term value.
This is often the key to consistent and meaningful value trade.
Don’t Fall for Email Alerts on Penny Stock Success
If you are reading this, I am sure you have a certain interest in ways to invest in penny stocks.
Often you get alerts about these amazing penny stock success stories.
You get the subtle advertisements that try to woo about the really low pricing.
The promise of profit on investing mere cents is often very enticing.
But the best approach will be to ignore these.
It is impossible to judge penny stocks that way.
Almost inevitably, you will not be able to identify scammers this way.
You just can’t invest in penny stocks like they were lottery tickets.
There has to be a proper thought and strategy that goes into your trades.
But unfortunately, most new traders end up falling for these great success stories.
The result, they buy the stocks and then are left with practically nothing more than junk.
The balance sheet is a very important catalyst for investment.
The penny stocks that you put your money in have to spell out value.
It is not sufficient to have a great success story on email.
You have to know it for your own self about the veracity of the story.
So when you plan to invest in penny stocks, look for growth drivers.
For every scam in making, there are genuine stories too.
There are many small-cap companies that have just started out and doing meaningful service.
The trick is to identify them and put forth your money.
Basically, you have to look for value buys instead of email heroes.
The value has to be intrinsic and growth-oriented.
You have to train your guns for those alternatives.
Look for penny stocks that hit 52-week highs and project reasonably great earnings.
The growth entrenched in the fundamentals is crucial.
Don’t Ignore the Disclaimers
Often when you invest in penny stocks, you come across a popular saying.
It is often about how penny stocks sold rather than being bought.
It means like many other customer oriented products, penny stocks’ sale is interesting.
On any given day, you must be getting hundreds of email alerts.
They tell you about a variety of small cap bargains.
There are often tips about buying penny stocks too.
But the problem here is instead of the tips, look for the disclaimers.
Penny stocks experts say, you must never pay attention to the tips.
Often these tips are more like a sales pitch.
They are created specifically with the motive to sell the product to you.
The whole purpose of the tips is to convince the investors.
Companies will woo you using a variety of means.
This can include your perception and the approach to the market too.
But when you are investing in stock markets, the risk is always a constant.
This is why you have to assess your risk in a constructive manner.
The idea is how you can hedge your risks in a meaningful way.
That alone can help you book profit and prevent substantial loss.
The overall idea, therefore, is to pay attention to the disclaimers.
Remember these penny stock companies try to be a step ahead of regulators.
That is why caution is often the name of the game.
That alone will determine how you can handle the investment portfolio.
You can either look for meaningful growth stories or end up with losses.
The disclaimer is mandatory as per the SEC regulations.
This is because it makes the investor make an informed choice.
This is why investors must read these carefully.
This will give them a right perspective on the stock.
Analyze Data Carefully
I mentioned that you must analyze the 52-week high hit by penny stocks.
What I mean is don’t just go and buy a small cap or a penny stock because it hit a high.
You have to undertake proper research.
Find out why a stock is hitting a milestone number or why is it rallying?
It is important to shortlist the triggers for this in a comprehensive manner.
There are many reasons why a penny stock rallies.
It can be because of strong fundamentals and earnings.
But the rally can be driven by strong speculative buying or due to buyers convinced by an email.
To figure out this difference is absolutely important.
In this context, you have to look at most of the data points carefully.
Go through the earnings performance of penny stocks carefully.
Get details of the revenue source and sustainability.
Often the future prospects are dependent on this element.
It is perfectly possible that a particular penny stock is a scam.
Now the company may cook the book and put up fake results.
This is why a proper perspective of the revenue and income source is crucial.
It will help you understand the company’s income source in a convincing way.
Moreover, you can also get an idea of how leveraged the business is.
If the company is spending more than it earns or has huge debt, this is your warning bell.
You should instantly be alert about a potential claim.
Also, analyzing the data can help you verify the claims on newsletters and emails.
You can easily decide whether a stock is really worth buying.
That will help you take a far more constructive call on investing in penny stocks.
Most newsletters don’t give you a clear picture.
They only provide relevant information.
Don’t Hold for Too Long
One of the basics of how to invest in penny stocks is don’t hold for long.
These are not blue chips.
This is neither like the family silver that you sell in times of need.
These are after all penny stocks.
You invest in them for temporary gains.
Given their low base, just a couple of cents make a huge difference.
Your overall idea needs to be booking quick profit and then exiting.
They can sometimes rally 20-30% a day or couple of days.
A seasoned investor will invest in this rally.
The purpose is to quick pocket the gains and get over with it.
Don’t let your greed take over.
Often what happens is traders start wanting more.
So they forget about 40-50% gains and aim for 100% and even 1000%.
Depending on the momentum, trigger and market conditions, it can rally.
But the question is how long the rally will last?
So when you are holding penny stocks for too long, you are also making yourself vulnerable.
You can even stand to lose the existing gains and not even recover the principal.
Remember these stocks are like a flowing river.
It is best to go with the flow and look for a firm ground to anchor as soon as you can.
The longer you hold these, greater the chance of a potential loss.
Create an individual target and go ahead as per that.
Let’s say you invest $100 in penny stocks and hope to make $75.
Exit the moment you have earned the desired $175.
At that time, if you then start raising your target, it is a problem.
You have to align your target with the actual worth.
Depending on the fundamentals, the rally will end after a specific period.
Don’t Go by the Management Version
Often the founder or the management of a penny stock company is the biggest risk.
The problem is that they have listed the stock with a specific objective.
It can be anything from doubling IPO offer to creating a façade for illegal business.
I am not indicating that all penny stocks are scam.
But you do see a much greater number of penny stocks in this segment.
That is why it is very important to exercise caution.
Often the management tries to talk the stock up.
That means they will deliberately pump positive news about the stock in the market.
The result, many unsuspecting buyers will fall for it and buy the stock.
The basics of demand-supply matrix set in.
You will see the stock price rising; more people start buying it.
Finally, it reaches a certain peak.
The founder sells the stock and escape.
The result is, poor investors are left with some very expensive junk.
They are not able to sell it, and holding also does not deliver results.
Often the same group will try releasing press releases from different sources.
The idea is to help the scammer earn at the cost of innocent investors.
There is often a trend in this.
You will notice that the same group will try and repeat the tactics.
The names of the companies and sectors may differ but not the method.
So just by believing management versions, you cannot invest in penny stocks.
You have to know it for sure how and why a stock is running up.
Commit cash only if you are very convinced about the rally.
Check for yourself if the rally justifies the revenue and price rise.
The management of many murky penny stocks has misused their power and credibility.
Stop Loss Crucial When You Invest in Penny Stocks
Learning how to invest in penny stocks is all about sticking to basics.
The problem is that the spread between the bid and ask price is sometimes very high.
It can be as much as 10% at times.
In that scenario, a stop loss is most important.
This is what will help limit your losses significantly.
But again at the same time, a very hard stop can result in huge losses.
This is exactly why you need to balance hard stops and mental stops.
The risk-reward ratio is extremely crucial.
You have to draw a fine line between possible risk potential.
This will also act as a potential speed breaker for investors.
Supposing there is a huge rally in a specific stock.
But I keep getting greedy and participate in the rally for even longer.
But then the stock crashes and starts falling.
It is the stop loss that will help put a break to the overall investment.
Moreover, the financial fundamentals should not be compromised.
On an average, the penny stocks can deliver value only if you manage it well.
Careful assessment of profit and loss is the best way to garner profit.
Therefore be alert about the pricing at every step.
Choose Stocks With High Volume
When you invest in penny stocks, always go for ones that have high volume.
The turnover and market capitalization are key indicators.
Moreover, a healthy volume also indicates a relatively fair trade.
So it is best to stick with stocks that average at least 100,000 shares every day.
Moreover, low volume stocks are also by far more illiquid counters.
Look at the pricing of the penny stocks too.
While they cost less than a dollar, don’t buy very cheap ones either.
Create some basic rules of the transaction.
Choose stocks between 50 cents to $1.
In that way, you can guarantee relatively decent volumes and some value too.
Generally volume and liquidity are also interconnected.
Almost always slightly better valued stocks also deliver good returns based on fair volume.
Therefore getting out of these counters can be a lot easier.
You will be able to derive substantial value from these counters in a meaningful way.
Needless to mention then selling these can be easier too.
The counters can be traded with relative ease and for a greater period.
This, therefore, is another important lesson in how to invest in penny stocks.
Limit Your Positions
When you invest in penny stocks, don’t be just buoyed by the price.
This is one of the most common mistakes.
Investors think they are so cheap that only a large position will justify.
But unfortunately, that is not a fair assumption always.
Never trade more than 10% of the stock’s average volume.
Remember these are volatile and extremely speculative plays.
They are potential mine-field for long standing risks.
As a result, you have to be cautious and tread gradually on this path.
So always go for limited volumes that you can sell easily too.
After all, we already explained the advantage of an early exit.
Remember these stocks can have a questionable track-record, so avoid emotional attachment.
Get rid of the moment you book profit.
Every penny stock company will try to sell that they are the next big story.
But believe no one but your own judgment.
Develop an eye for details and pay attention to the fine print.
Deal with penny stocks as per their valuation and fundamentals.
Not all stocks need to be loved or held forever.
Also, keep a moderate expectation from these penny stocks.
This is one of the cardinal principles of how to invest in penny stocks.
Be satisfied with moderate gains.
Greed is never good when you invest in penny stocks.