You have ventured forth into penny stock territory and might be wondering what some key strategies are when starting off in buying penny stocks online. Following some key guidelines will allow you to surf the ups and downs of penny stocks smoothly. Let’s take a look at 10 guideposts along the way.
#1 – Don’t fall in love with any one penny stock when buying online.
Penny stocks have a bad reputation for a reason. In spite of your investor friend praising one stock up and down, be wary! A company will want to sell you on why they are the difference in their own industry. How they are God’s own savior in revolutionizing their little part of their business realm. But, there is a reason why everyone says not to put all your eggs in one basket! A well-diversified portfolio of up to 20 different stocks is your safest bet.
#2 – When buying penny stocks online, choose the best of the crop.
Timothy Sykes, a penny stocks expert, explains that he looks for penny stocks that have proven track records. “I love buying penny stocks when they have good earnings, or when they are breaking out to 52-week highs on volume that is at least a quarter million shares a day,” he said. “They are easy to find if you look.”
#3 – Ignore hyped up penny stocks success stories that promise the world.
This guideline falls right in line with watching for stocks’ real-time earnings. Companies, e-mails, and social media can say all manner of reassuring words concerning why you should invest in certain penny stocks, but, unless they have proven, real-time earnings, be wary of any words!
Timothy Sykes says, “You have to say, ‘no.’ You can’t invest in penny stocks as if they were lotto tickets, but, unfortunately that’s what most people do, and they lose again and again. Think of penny stocks as inmates in a prison that you can’t trust.”
#4 – In other words, don’t listen to penny stocks tips and read the disclaimers in all e-mails.
Timothy Sykes makes a very good point on this: “The free penny-stock newsletters are not giving you tips out of the goodness of their heart. If you read the disclaimers at the bottom of the newsletters, they are getting paid to pitch a stock because their investors want exposure for the company. There is nothing wrong with wanting exposure, but, almost all penny newsletters make false promises about their crappy companies.”
There is a very real difference between a company who authentically has built a 52 week high in earnings over a company who has built a 52 week high based on promotions in e-mails. One is destined to be a pump up and dump scheme!
#5 – To put it in another way, don’t listen to company management when buying penny stocks.
It’s their job after all to have people invest in the company. All the press releases and marketing are generated to help the ones in charge of running the advertised company. Timothy Sykes once again leans on skepticism. “You can’t trust anyone. The companies are trying to get their stock up so they can raise money and stay in business. There is no reliable business model or accurate data, so, most penny stocks are scams that are created to enrich insiders.”
#6 – Focus only on penny stocks with high volume.
You only want to go with penny stocks that trade at least 100,000 shares a day. Any less and it might be hard to sell when the time comes. A good guideline is to trade penny stocks that are priced more than 50 cents per share. With penny stocks trading at this price and in the high volume of 100,000 it shows the shares are liquid and easy to sell.
#7 – When your penny stock is in a good position, sell quickly.
Some investors want to hold out for the 1000% return, but, end up losing all they have invested. When buying penny stocks, it is best to take any profits and walk away satisfied. A common draw to penny stocks is the ability to make 20 to 30% in returns in just a few days. If this does indeed happen, be happy enough to sell and move on!
#8 – Determine your risk tolerance when buying stocks and use mental stops based on that tolerance level.
Timothy Sykes shares his strategy, “I focus more on risk-reward than stops. If I want to make a dollar a share on a three-dollar stock, I will cut my losses at 20 cents so I have a 5:1 risk reward. I aim for 3:1 or 4:1, but, not 1:1 or 2:1. If I think a dollar stock has only 50-cents upside (2:1), my mental stop loss will be at 10 cents because the risk-reward is better.”
#9 – Be moderate in your trading portions when trading penny stocks.
This goes along the lines of not putting all of your eggs in one basket. Sykes warns, “You really need to be careful with position sizing. I learned the hard way not to trade big. My rule now is not to trade more than 10% of the stock’s daily volume.”
#10 – When buying penny stocks, it’s tempting to sell short; don’t do it.
Selling short is a pro strategy and best left in that department. After all, penny stocks are indeed volatile and if you are on the down side of the trading transaction you could end up losing a significant amount. Just don’t do it, kids.
So, to sum it all up, stay away from hyped up words about supposed El Dorado companies. Do the time in researching and getting down to discovering the truly successful companies. Trust your gut and don’t be greedy. Happy trading, investors!