Investing in penny stocks provides traders with the opportunity to dramatically increase their returns; however, it also provides an equal chance to lose your money rapidly.
Here are the five important strategies that basically help you lower the risk and make better investment decisions.
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1. Penny Stocks are a penny for a reason
While most of the investors dream about investing in the next Google or the next Amazon, the reality is, the odds of you discovering that once in a decade success story are slender. These corporations are either starting out or acquired a shell business because it was low-priced than an IPO, or they basically do not have a business plan persuasive enough to rationalize investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should make you be realistic about the kind of business that you are investing in.
Search for an unswerving high volume of stocks being traded. Watching at the average volume can be confusing. If Google trades 2 million stocks today, and doesn’t trade for the rest of the week, the daily average will appear to be 400 000 stocks. In order to get in and out at a satisfactory rate of return, you need steady volume.
Furthermore watch at the number of trades per day. Is it 1 insider selling or buying? Liquidity must be the primary thing to look at. If you find no volume, you will end up holding “dead money”, where the only way of selling stocks is to dump at the bid, which will situate extra selling pressure, resulting in an even worse sell price.
3. Does the business know how to create revenue?
Despite the fact that it is not at all uncommon to consider a start-up firm run at a loss, it is highly significant to look at why they are failing in generating revenue. Is it adaptable? Will they have to look for additional financing or will they have to look for a joint partnership that favours the other firm?
If a firm makes sense how to generate a profit, the firm can use that cash to develop their business, which surges shareholder value.
You have to do some research to discover these firms, however when you do, you lower the risk of a loss of your principal, and increase the odds of a much higher return.
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4. Make sure you have an entry and exit plan – and stick to it
Penny stocks are highly volatile. They will rapidly move up, as well as move down. Recall, if you buy a stock at $0.20 and sell it at $0.24, that represents a 20% return on your investment. A four cent decline leaves you with a 20% loss. Several stocks trade in this series 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 signalling you something important and whether you want to accept it or not, it is generally finest thing to listen.
If your plan was to sell at $0.24 and it jumps to $0.26, either take the 30% gain, or better still, place your stop at $0.24. Lock in your profits while not stopping the upside potential.
5. How did you find out about the stock?
Many people find out about penny stocks through a mailing list. There are number of decent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on stocks, and then begin to pump the company to unsuspicious newsletter subscribers. These subscribers buy while insiders are selling. Predict who successes here.
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How to discover the worthy firms from the bad? Simply subscribe, and track the investments. Was there a legitimate prospect to make decent amount? Do they have a track record of providing subscribers with great opportunities? You’ll begin to notice quickly if you have subscribed to a decent newsletter or not.
Make sure that you only invest not more than 20% of your overall portfolio in penny stocks. If you put too much of your capital at risk, you increase the odds of losing your capital.
This information is for Learning purposes only. We are indeed not financial mentors. It should not be considered legal or financial advice. You should consult with a financial advisor or other professional to find out what may be the finest for your individual needs and risk tolerance.
Please do your own research.