5 Tips for Investing in Penny Stocks
Investing in penny stocks provides traders with the opportunity to increase their profits dramatically; however, it also offers an equal opportunity to lose your trading capital quickly. These five tips will help you lower the risk of one of the riskiest investment vehicles.
1. Penny Stocks are a penny for a reason.
While we all dream about investing in the next Microsoft or the next Google, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting or purchased a shell company because it was cheaper than an Initial Public Offer (IPO), or they simply do not have a business plan compelling enough to justify investment banker’s money for an IPO. Penny stocks are not lousy investments, but it should make you realistic about the kind of company that you are investing in penny stocks. Check out their intrinsic value!
2. Trading Volumes
Look for a consistently high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn’t trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding “dead money”, where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.
3. Does the company know how to make a profit?
While it’s not unusual to see a startup company run at a loss, it’s important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company after investing in penny stocks?
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 entry and exit plan – and stick to it.
Penny stocks are volatile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range daily. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this five 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 telling you something, and whether you want to admit it or not, it’s usually best to listen. If you planned to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.
5. How did you find out about the stock?
Most people find out about investing in penny stocks through a mailing list. There are many excellent penny stock newsletters; however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.
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 would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you’ll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?
To get you started with investing in penny stocks, here are two very promising companies that are in pre-IPO stages:
- SkyWay Capital. – Skyway Technologies Company specializes in high-speed elevated rail transportation, vacuum glass (thermal insulation); linear cities; bridges, viaducts and overpasses. SkyWay Capital is offering pre-IPO share allotments at 4 cents/share. Become a partner and earn commissions. Click here to read more.
- Solar Group Innovative Developments. Duyunov’s technology “Slavyanka” applied to induction electric motors is based on the combination of two classic winding types – “star” and “delta” connected in parallel. Dmitriy Duyunov enunciated the principles of making the windings, backed them up with the patents and demonstrated their efficiency in action. Solar Group is offering pre-IPO share allotments as low as 1 cent/share. Click here to get started.