5 Tips For making An Investment In Penny Stocks

Comments Off on 5 Tips For making An Investment In Penny Stocks 08 June 2011

Making an investment in penny stocks provides traders with the chance to seriously increase their profits nevertheless, it also provides an equal chance to lose your trading capital fast. These 5 tips may help you lower the chance of one of the chanciest investment automobiles.

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 likelihood of you finding that once in 10 years success story are thin. These firms are either starting and got a shell company as it was less expensive than an IPO, or they just don’t have a business proposal pressing enough to explain investment banker’s money for an IPO. This does not make them a unprofitable investment, it should make you be practical about the type of company you are making an investment in.

2. Trading Volumes Look for a consistent large volume of shares being traded. Taking a look at the average volume can be deceiving. If ABC trades 1,000,000 shares today, and does not trade for the remainder of the week, the daily average will seem to be two hundred 000 shares. To get out and in at an OK rate of return, you want consistent volume. Also glance at the number of trades each day. Is it one insider selling or buying? Liquidity should be the very first thing to take a look at. If there is not any volume, you may finish up holding “dead money”, where the only possible way of selling shares is to dump at the bid, which should put more selling pressure, leading to an even lower sell price.

3. Does the company understand how to earn a profit? While it is not uncommon to see a start up company run at a total loss, its critical to take a look at why they’re losing money. Is it controllable? Will they must seek further financing ( leading to dilution of your stock ) or will they must look for a joint partnership that favors the other company?

If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an exit and entry plan – and stick to it. Penny stocks are volitile. They may quickly move up, and move down just as fast. Remember, if you purchase a stock at $0.10 and sell it at $0.12, that represents a twenty percent return on your investment. A two cent decline leaves you with a twenty p.c. loss. Many stocks trade in this range on an everyday basis. If your investing capital is $10 000, a twenty p.c. loss is a $2000 loss. Do this five times and you are out of cash. Keep your stops close. If you get stopped out, move on to the subsequent opportunity. The market is letting you know something, and whether you wish to fess up or not, its typically best to listen.

If your intention was to sell at $0.12 and it jumps to $0.13, either take the 30 percent gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.

5. How did you learn about the stock? Most folks find out about penny stocks thru a mail list. There are numerous glorious penny stock newsletters nonetheless, there are as many that are pumping and jettisoning. They, with insiders, will load up on shares, then start to pump the company to credulous newsletter customers. These customers buy while insiders are selling. Guess who wins here.

Not all newsletters are bad. Having worked in the business for the last eight years, I’ve seen my share of underhand corporations and promoters. Some are paid in shares, infrequently in restricted shares ( a deal whereby the shares can’t be sold for a destined time period ), others in readies.

How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities? You’ll start to notice quickly if you have subscribed to a good newsletter or not.

One other tip I might offer to you isn’t to invest more than twenty p.c. of your general portfolio in penny stocks. You are investing to earn money and preserve capital to battle another battle. If you put far too much of your capital in peril, you increase the chances of losing your capital. If that twenty p.c. grows, you may have more than needed money to make a good rate of return. Penny stocks are dodgy to start with, why put your cash more in danger?

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