There are thousands of penny stocks listed on the major exchanges and over the counter. Every day you see penny stocks jumping 20 to 30% or more in price. With so many penny stocks from which to choose, how do you find the winners? First of all, don’t forget that these stocks are risky. They can just as easily drop precipitously as hit the moon. If you want to gamble, the casino may be a better choice. There at least you know the odds. Here are some tips that may help you make better choices investing in the world of penny stocks.
1. Never risk more than you can afford to lose. Use only a part of your financial resources to invest in these high-risk stocks.
2. Since most penny stocks, but not all, will never amount to anything, set your time frame for a shorter holding period. Plan on making short-term profits. This does not mean there are no long-term opportunities, just that there are more short-term chances to make a quick buck.
3. Stock investing in general is an art as well as a science. It takes study and practice to become a pro. Even the best investors still make mistakes. They simply make enough good decisions to cover their losses and still come out ahead. If you are not willing to read, study and research the market, you will be at the mercy of others to feed you recommendations. The problem with relying on recommendations is that they often conflict with each other. It is not difficult to find stock where one analyst says “buy” and another says “sell”. Who is right? That is when you need to know how to decipher the truth. That only comes with critical thinking and knowledge.
4. Build up a list of penny stocks that you wish to follow. Get to know the companies and what makes them tick. Watch the company news. News can have a large and fast effect on penny stocks.
5. Pick a price range in which you want to specialize. Stocks under a dollar behave differently than stocks between 4 and 5 dollars.
6. You may wish to focus on just one exchange, such a the NASDAQ, NYSE, AMEX, or OTC. Trying to follow everything, everywhere will leave you strung out and confused.
7. Pick a strategy. Some penny stocks pay high dividends. Others have options that may make them good candidates for covered calls or naked puts. Others are making new discoveries that could skyrocket their stock price if the research and development are successful. There are many more ways to play penny stocks. It is best to specialize in one that fits your investment style and financial situation.
8. Cover your investments with a stop loss. You will probably not be able to monitor all your stocks, all the time. Another advantage of a stop loss is to take the emotional roller coaster out of the equation. If your stock is losing money beyond your predetermined limit, your stop-loss order will quickly and unemotionally make the decision for you. You don’t want to ride your stock down hoping that it will turn around. Set a limit to your loss.
9. When placing a buy order, always make it a buy limit order. If the stock has a large gap between bid and ask and there are few buyers, you may pay much more than you expected on a market order. When you try to sell a low-volume stock, you may not find many buyers. A market sell order may be low-balled by sharks waiting to take advantage of inexperienced and careless investors. A loss limit order will also prevent you from doubling down on a losing position. You have to learn to take losses. Doubling down on a mistake may only amplify the loss. It is often referred to as trying to catch a falling knife.
10. Unless you are a low-volume expert, trade penny stocks that have a high volume so you will not have any trouble selling them when they peak or trough. Avoid buying penny stocks in pre-market or post-market trading because the volume is usually much lower than during regular market hours.
11. Be stoic. Do not fall in love with a particular stock. You may love the product, idea, or management team, but if the stock is not doing what you expect, sell it and don’t come back unless there is a material change that makes it a better investment.
12. Keep track of your strategies to see which ones work and which ones don’t. Try to determine why they were a success or failure.
13. Never trade on hot tips or ads. Many of the ads you read are pump and dump schemes. Very often following hot stocks will get you in just when they are peaking and ready to deflate. It is ok to investigate these stocks but never trust the tipster. Very often, after doing your due diligence, you will find these “hot” stocks are highly leveraged, nearly bankrupt, without assets, and just plain losers. Only buy a stock when your buy or sell criteria have been met.
14. You may get overly excited when you see a stock rising rapidly on high volume and want to jump in quickly before it goes higher. Be careful. This is an emotional decision called FOMO – the fear of missing out. The problem here is that by the time you get in, it’s too late and you have already missed out. Even if you do miss out, this play is risky and more like rolling dice than investing. There are plenty more opportunities out there.
15. “Know thyself.” This ancient Greek aphorism is just as true today as it was many years ago. Human behavior has been applied to investing. The findings of this research form the basis of behavioral investing. It is very important to understand how your emotions come into play when investing. To be a successful trader you have to understand and control your emotions. Being a successful trader requires discipline and perseverance.