Penny stocks are alluring, the reason why millions of people worldwide choose to invest in them. They offer high rewards with minimal investment. The low investment leads to people also treating penny stocks as lotteries. However, these people often hand over their money to more strategic penny stock investors. So, do you want to be in the group that hands out money or the one who makes big bugs with penny stocks? Without a doubt, the latter, follow our tips to trade in penny stocks and you should do better than most investors.
Penny stocks are shares of companies that are new or upcoming, which makes the shares highly speculative. Traditionally, they mean any stock that is priced less than a dollar per share, but more recent exchange definition states penny stocks as stocks that are less than $5 per share.
When trading in penny stocks, you should respect the risk associated with the trade, avoid any hype, and follow the tips we have shared.
12 Penny Stock Trading Tips
Tip 1: Don’t Buy Into the Hype
The first tip we want to share is about the hype involved in penny stocks. In trading, penny stocks are probably the riskiest in terms of scammers. You should not believe the stories you hear on Facebook, where a housewife or a student made $100,000 investing in penny stocks or any other similar stories. You may also receive anonymous emails with penny stock tips. The people sending these emails aren’t doing it with the good of heart but they are promoting a shading company that’s likely to drown your money. The emails can also come from a website where you exchanged your email ID in exchange for the touted ‘valuable information’.
Tip 2: Don’t Go with the Tip
The reason you should disregard penny stock tips is because whoever is providing the tip isn’t giving it just to you, but probably tens of thousands of people. Word of mouth takes the tip even further and the stock is already overpriced before you decide to buy. When you opt-in such share, you are buying an overpriced, matured share that’s going only one way – downhill.
Newsletters that provide the penny stock tips are even worst, read the disclaimer below the newsletter. The website sending the newsletter is getting paid to promote their investors. They put the disclaimer there only because SEC requires them to. But, it’s not the promotion that’s wrong, but rather the false promises made by the website in the newsletter.
Tip 3: Don’t Hold the Share Too Long
Most new investors who make a good profit from penny stock get greedy and ultimately end up losing money. A high fad penny stock can quickly turn low fad. When you have made a profit of 20% or 30%, immediately sell the shares because the gains can quickly turn into a loss.
After making a good profit people wait in the hopes of further increasing the profit, which can happen in some cases but the risk is too high. Sell the share after making any profit and move on to the next.
Tip 4: Don’t Believe the Companies
Penny stock is a dog eat dog world. You should not trust anyone and the least the companies who want you to buy their stocks. There are fewer legitimate businesses behind the stocks. The companies want you to buy their shares so they can raise capital and stay in business. In the worst case, there is no company behind the penny stock and it’s a scam to enrich the insiders.
These companies run large promotional campaigns with press releases, ads, and other marketing techniques to lure unsuspecting investors to buy their shady shares.
Tip 5: Don’t Short the Shares Yourself
Shorting shares is difficult. A share may seem alluring due to its pumped-up price, but that can easily be due to a few newsletters that got large clicks or people bought into the hype. Such shares will not sustain and the price will fall leaving you with a huge loss. Leave shorting to the pros.
Tip 6: Don’t Trade in Low Volume Penny Stocks
Ideally, you should look for penny stock that trades a minimum of 100,000 shares in a day. If you buy a share with a low trade, you may not be able to sell it. That would be a tough spot even when you have made a profit. You should also pay attention to the per dollar value of the share. Look for shares that are valued higher than 50 cents. Penny stocks that have less than 100,000 trade per day and are valued at less than 50 cents per share are not liquid enough and sustainable.
Tip 7: Cut Your Losses Fast
Every investor makes mistakes and wrong bets, but cutting your losses in time can save you thousands of dollars. Identify you have made a mistake and cut your losses as fast as possible. If you are into buying pumps, allowing the losses to spiral can deal large financial damage and take you out of the game. If you are trading with a small capital, it only takes one bad decision to end the game for you. So, after you have made a mistake sell fast and start anew.
Tip 8: Practice with Paper Trading
If you are just starting out with trading in penny stocks, it’s best to test your strategies with paper trading. Paper trading does not involve real money. It uses the real stock value to test your strategies. Online websites allow you to paper trade for free. Once you have established your investment technique through paper trading, you can move to real trading.
However, don’t jump the gun and invest a large amount of money at once. Invest small and as your investment stars to pan out increase the amount or keep investing the profits from previous investments.
Tip 9: Don’t Buy OTC Penny Stocks
Any successful investor would advise you to stay away from over the counter (OTC) penny stocks due to the lack of accountability and transparency. Exchange such as NASDAQ or NYSE has strict guidelines that companies need to adhere to in order to be listed. These guidelines include complete financial transparency and maintaining the per stock value above $1. Companies that fail to abide by the rule list their stock in OTC exchanges.
Companies listed on OTC do not have financial transparency and may be in a bankruptcy filing, which makes them a bad investment. The OTC market still functions because people simply do not know much about penny stocks and they treat them as lotteries or are buying due to a tip from a shady broker.
Tip 10: Stick with What you Know
The best penny stocks are the ones you know about and not the ones you hear from a friend or relative. If you are in a profession such as software developer, it’s likely you know more about tech companies than most people investing in penny stocks. Choose a company that is familiar to you and has potential in the future. Buy stocks that have been rising in value for a long time, but not due to pump and dump schemes.
Tip 11: Don’t Trade Large Volumes
You need to be careful about trading large volumes. If you have bought a large number of penny stocks from a company selling the share when the stock is taking loss becomes difficult. As a general rule, you should not trade more than 10% of the share’s daily trade volume.
Tip 12: Don’t Get Emotionally Attached to a Stock
The worst mistake you can make trading penny stocks is getting emotionally attached to a particular stock. Companies would make big promises and would present themselves as the next Google or a company about to bring a revolution with advanced technology, but rarely such promises come to be true. You should remember why you got into penny stock i.e. to make quick profit and exit.
Conclusion on Penny Stock Tips
Overtime penny stocks have had a lot of bad reputation and for good reason, but there are also people who have made a lot of money fast with penny stocks. The difference lies in education. Some people treat penny stocks as lottery tickets, while others have a more strategic approach. People who understand the risk and take calculated decisions are the ones who gain big. If you follow the tips we have shared in the post, most hurdles in penny stock trading will be eliminated and you will have the possibility of making large sums of money.