The reason why there is such a mad scramble for penny stocks could be because of the fact that they are very cost effective and at the same time promise returns which are quite big to say the least. However, on the other end of the spectrum one could also lose a lot of money in penny stocks.
You can certainly make profits if you are able to know the rules of the game thoroughly. If not, you could be certain to lose money instead of making it. The fact that there are a number of scammers and manipulators running the show makes it even all the more difficult. Hence, you better be in a position to differentiate the grain from the chaff to end up making money
However, if you are one of those who cannot afford blue chip shares, these penny stocks are indeed good option. With a very small investment, you could end up with a decent return. To cite a small example if you can set apart $3,000 and buy a bouquet of 10,000 stocks at $0.30 apiece, and sell the same after a few days for $1.00 apiece you could end up making a net profit of $7,000.
But if you are one of those who do not have $3,000 to spare, you need not worry. There are other easier ways out. First and foremost you have to be aware of the dubious penny stock touts who try and prey on the investor’s fear of inflation. [wp_ad_camp_1]
You will do better to be aware that in spite of strict rules and even stricter regulatory mechanisms, some ill-meaning promoters who are able to give the slip to these rules and regulators. In spite of the inherent risks involved, people continue to flock as far as trading on these pennies are concerned.
Before being carried away by those flashy advertisements on the internet or some other media, make sure you are aware of the following ground rules to avoid being taken for a ride.
1. Ignore “Success Stories”
• You should try and ignore those so called success stories that are certain to flood your inbox as far as penny stocks are concerned. You have to understand the fact that penny stocks are not lotto tickets and hence there is very little for speculation or providence here. Research and invest only on those profitable penny stocks which have shown solid earnings over the past 52 weeks or so.
2. Read the Disclaimers
• Many of us tend to give focus and attention to the tips and avoid reading the disclaimers. The problem is that these disclaimers are often available in fine print but this is where we should pay our attention to. The disclaimers will educate you about the fact that these penny stock brokers are being paid by companies to pitch for the stocks of many companies. While there is nothing wrong in pitching for such companies, in many cases the penny brokers tend to overdo it and paint a very rosy picture when one may not exist at all.
• Further it is also important to differentiate between stocks that have done well on a 52-week period and stocks which presumably have done well over the same period because some newsletter claim that they have done so. Reading the disclaimers at the end of the newsletter will certainly throw a lot of light because many of them do not tell the actual truth.
3. Sell Quickly
• You should also understand the importance of learning to sell quickly. Even if you make a 20 to 30% profit you must not hold on to such penny stocks and get into the habit of booking profits quickly. If you are aiming for a1000% return you are likely to get stuck more often than not.
4. Don’t Listen to Company Management
• The penny stock world though full of money making opportunities is also murky and shady. You must learn not to trust anyone and especially the company managements. Many of the companies float juicy stories so that their stocks go up and they are able to stray put in their businesses. In the absence of reliable data, you need to be careful and should be able to differentiate the good from the bad.
5. Don’t Sell Short
• While booking profits quickly is important, you also must get to learn the art of not selling short. Penny stocks are extremely volatile and by short selling you could end up losing even up to 50% of your investment. If you really want to sell penny stocks short you should better leave it in the hands of professionals. Getting to understand the importance of focusing only on penny stocks that are traded in huge volumes is also another important thing that should be kept in mind. Dealing with low volume stocks could make it difficult for you to come out of your sticky position, should you fall into it.
6. Focus on Penny Stocks with High Volume
• Since the bid-ask spreads could be quite high on many penny stocks and could even go up to 10% you should be wary of hard stop losses which could make a big hole in your pocket. You must understand the importance of using mental stops which of course requires good concentration. Understanding the importance of go in for a 5:1 risk reward is much better than trying to narrow it down to 1:1 or 2:1.
7. Buy The Best Penny Stocks
Read also: Tips to Buy Penny Stocks Online
• Gauging the market, studying it well and researching will help you to buy only those penny stocks that are good earnings or have at least a quarter million shares a day when they are breaking on to the 52 week high position. Good companies like Tango, MAGS, and Staar Surgical Co., are a few examples of well performing scripts as far as penny stocks are concerned.
8. Avoid to Trade Large Positions
• Sizing the right position is also very important if you are keen on making decent money in penny stocks. Staying away from big trading is something that is learnt the hard way by many. As a thumb rule, you should trade anything more than 10% as far as daily stock volume is concerned.
Last but not the least, you should never allow your heart to take control of the mind as far as penny stocks are concerned. You can least afford to fall in love with a stock when the going is so volatile and uncertain.