Trading penny stocks can be a great profit source to your portfolio when you understand the rules of the game, but the odds are against you when you don’t. Here are the most important things you should know before start trading penny stocks:
1. Choose and know your strategy!!!
This is the most important rule to know before trading penny stocks. You must have a solid clear strategy,
Here you will learn the Value strategy – used to determine real value of a stock.
2. Choose and know your strategy!!! (again)
Nope, this is not a mistake – knowing your strategy is that important,
In your “Investor Toolbox” you should also have Technical analysis strategy – that is used to determine the next stock move and to find the best sell/buy time.
3. Diversify – don’t buy big positions
The high volatility makes it risky to buy large positions – as a rule of thumb while trading penny stocks is don’t trade more than 10% of the stock’s daily volume
4. Be rational
It happens to all investors – even to the pros, but it is wrong and they usually regret for it – Don’t fall in love with a stock!
Let the numbers talk, and only the numbers. If a stock isn’t right according to your trading penny stocks strategy cold numbers – it does not fit, and you are not investing.
5. Check penny stocks trading market of exchange
Make sure that available penny stocks are traded over a regular market exchange and not as over-the-counter.
Over-the-counter, or OTC, stock listings don’t require the same disclosure and regulation as larger stocks, and that can create additional risk.
6. Buy only the best
Look for penny stocks that fit your value strategy (More about stock value strategy here) and has high real value, also find the stocks that their technical analysis state is optimal, like for instance when they are breaking out to 52-week highs on high volume (more about technical analysis here).
If a stock does not fit to all your criteria’s – DON’T BUY IT. You should not compromise.
7. Be cautious with listening to company management
The company management has an interest – they are trying to get their stock up so they can raise money and stay in business, it is especially true when trading penny stocks.
8. Liquidity – Focus only on penny stocks with high volume
One of the risks when investing in penny stocks is that you can’t buy and sell as soon as you want to, because there are not enough sellers and buyers. As a rule of thumb, stick to stocks with volume of at least 100,000 shares a day
9. Know the risks
Trading penny stocks comes with a unique set of risks on top of the regular stock trading:
– Not enough information and history data –Penny stocks aren’t necessarily traded on the stock exchange (but in OTC markets), so they don’t have to file with the SEC.
– No minimum standards – If the stock is traded only on OTCBB exchange, there are no minimum standards that they have to fulfill to remain on the exchange market.
– Less liquidity- As we already mentioned, Penny stocks are often hard to find a buyer for. If you can’t find a buyer, you may have to lower your asking price until it’s no longer profitable to sell.
– Volatility – Penny stock are highly volatile for better and for worse – be ready for a roller coaster and don’t be intimidated of Steep changes.
10. Tips from analyst, company management and other third party can fail you
It is not uncommon to find tips about small intriguing penny stock that come your way in emails and newsletters.
If you’ll read the disclaimers at the bottom of the newsletters, you’ll see they get money to highlight that stock because their investors want exposure for the company.
The company management also has an interest – they are trying to get their stock up so they can raise money and stay in business.
After understanding the penny stocks world a little bit better it is time to acquire the tools needed:
You must have a clear solid value strategy that will help you find the good stock from the bad ones.
After picking the right stock we will use The Technical analysis Investment method to decide when is it a good time to buy and when to sell.