Penny stocks are very much like normal stocks apart from the fact that they are not traded on the main stock exchanges. Penny stocks are, by definition, stocks that are trading at or below $5 a share. The purpose of trading penny stocks is the same as regular stocks: Try to buy low and then sell higher.
Penny stocks are much more volatile than normal stocks and herein lies their main advantage AND their important disadvantage. Penny stocks can and do double their price in only one day where it could take weeks, months or even years for a regular stock to do the same. For some reason, it is far easier for a stock priced at one cent per share to boost its price to two cents a share than it is for a stock worth thirty dollars per share to double its worth to $60 a share.
What all of this means to the investor is a good news/bad news kind of thing. Bad news first: These stocks can be so volatile that you are able to lose your full investment in less than a single day. It’s nothing for a stock worth one cent a share to go to nothing quickly. Regular stocks can also go to nothing but they will take a much longer period doing it, giving the investor an opportunity to cut his or her losses and keep a part of his or her capital.
You can easily be taken out by these stocks if you are not paying close attention with your finger ready on the sell trigger. Penny stocks do not habitually act as you might expect after studying up on the fundamentals of a company. In the world of penny stocks, one frequently sees good corporations going down and bad corporations going up.
The good news? You are able make a sizable percentage increase fast with only a little amount of cash at risk. And, although you can lose the majority or all of your capital quickly, you will not be damaged that much if you have only risked a tiny part of your whole net worth. Admittedly, investing a penny and having two pennies the next day is not going to alter your life that much and so you may be tempted to try to double a much bigger initial investment. Because of the volatility of penny stocks, you should never put in more than you can afford to lose.
How, then, can you shift the odds to your favor? It’s all about picking the correct penny stock and you may require some assistance there. Use professional stock picks from an honest stock-picking service as a starting place. Make a listing of the ten top penny stocks from the stock picker and then do your own due diligence. List these ten stocks on a spreadsheet and generate columns for company earnings, book value and the like.
As mentioned above, penny stocks don’t continually function as you might expect from the fundamentals but much of the time they do, so going through the above exercise is not foolish. Listing the ten stocks on a spreadsheet helps you see readily which one of the ten is most likely to succeed. After making your buy, keep a record of the real performance of all ten stocks, including the ones you didn’t buy. This will be a splendid learning mechanism for you.
Benefit from your past errors. Try to comprehend what went wrong and why. Don’t make the same mistakes again. Watch what other traders are doing and learn from their successes and failures. If the cost of a stock is low, attempt to discover if it is just because it hasn’t yet been noticed or if, instead, the firm is in financial difficulty. Buy the former never the latter.
If you have a sizable win of 100% or more, it’s time to get rid of all or a fraction of your holding in that stock. There are several ways to resolve this. You could sell 50% of your shares and let the other half ride or, instead, you could leave one third in, sell one third for cash in your pocket and sell then invest the proceeds of the final 1/3 in another, different, penny stock. Don’t get greedy and keep a stock past its time. What goes up must come down and penny stocks usually do that quickly.
If the stock keeps climbing after you have sold it, don’t fret. There will be another train leaving the station in five minutes. The main idea is to purchase under-valued stocks and then get rid of them in advance of becoming over-valued. Never purchase or sell for emotional reasons. Continually go by the numbers and stay on your plan.
Finally, beware of hot penny stock tips from promoters. Promoters purchase a penny stock and then attempt to get everyone else on the planet to buy the same penny stock, thus driving the value up. Since they made their purchase before you, they will make a one hundred percent gain or more before you do and will then dump the stock like a hot potato creating an immediate and unexpected decline in share price at your expense.