9 Important Things to Consider When Trading Penny Stocks

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In the stock market, buying penny stocks is exciting because of their potential for big returns with minimal investment. Even penny stocks with minimal capital can possibly get a big payoff if investors know which stocks to invest in. Penny stocks are defined as stocks under 5, though often they trade for even less than a dollar per share, hence the name penny stocks.

Understanding which stocks to buy is crucial for stocks under 5.

These shares are held for a shorter period of time whereas, traditionally, investing consists of long-term holds. Many of these stocks are speculative in nature; not only is doing thorough research important, but, so is knowing what to look for when buying penny stocks.

Here are 9 things you will want to know before buying penny stocks:

#1: Pick your penny stocks based on research, not hearsay. 

You will certainly come across penny stocks billed as “big winners,” ready to explode higher. Many of these penny stocks opportunities are actually scams propagated by misleading information. Take the time to research and find penny stocks yourself based on data, not outlandish statements.

#2: When choosing penny stocks to buy, know your numbers.

Before buying penny stocks, take the time to observe for a while first. Determine which stocks to watch then track their numbers for some time to find out how the price of the stock moves. Have both an entry price in mind as well as an exit price. Know when you will sell your shares should they decrease in value so as to limit your loss. Also determine when you will sell higher to make a profit. You can even configure these transactions to automatically be processed to make sure everything goes according to plan.

#3: Avoid this typical pitfall to buying stocks: Don’t get greedy.

You can lose that 20%-30% return just as quickly as you made it, so, be sure to quit while you’re ahead. Stocks in the penny stocks market are very volatile and you must strike while the iron is hot rather than hold out for a greater gain in the future. Take your profits when you can and keep forging ahead.

#4: After selling your penny stocks, don’t look back.

Once you have sold a stock, move on to the next one and disconnect emotionally from the previous one. Business is about looking forward, ahead, not to the past. Watching a stock you already sold as it climbs higher and higher in the following weeks and months is not going to help you move on with your own investments. Only check-in on the price of the stock for your own educational purposes, but, never ruminate.

#5: Be skeptical of those involved with your penny stocks investments.

From company management, online sources, to even your stockbroker, never take someone at their word without researching first. In the world of penny stocks, misleading or even fraudulent claims are common. If you’re buying stocks online or elsewhere, do your due diligence by confirming any claims with independent research from reputable sources.

#6: Keep a long position in the penny stocks market.

This is another way to basically say don’t sell short. Penny stocks are extremely volatile and, as with any market, there are risk and rewards. When you purchase a stock, your losses are limited to your investment, but, the moment you take a short position on a stock, your losses can technically rise infinitely as the stock possibly continues to rise. The large swings in penny stocks make short positions extremely risky, so, don’t try this at home.

#7: Stick to penny stocks with a high number of shares traded on a daily basis.

Too little volume means it could be very difficult to find a buyer to liquidate your position. This can be a disastrous place to be when a stock is on the decline. Note that the size of your position will also affect how easy it will be to liquidate, so, keep your position relatively small to the average volume that is trading every day in order to protect yourself from losses.

#8: Don’t forget to study the underlying company behind penny stocks of interest.

A common mistake made by those who buy penny stocks is picking which stocks to buy based solely on technical signals. Don’t forget to research the underlying company of the penny stock in question. Look for companies with solid earnings patterns making new highs that are paired with strong fundamentals. There are in fact plenty of good companies listed as penny stocks that make great long-term investments if you are savvy enough to spot them. Companies like True Religion, Pier 1 Imports and Monster Beverage were all once penny stocks that blew up because the underlying company offered a unique product which was highly competitive on their respective markets.

#9: You won’t make it in the penny stocks game being an emotional investor.

There’s a reason they say “this is business, nothing personal.” Money absolutely is an emotional issue since our financial circumstances directly impact our security, well-being and future safety in this cruel, capitalistic world. But, don’t let that underlying passion or need for money interfere with making smart choices. Which stocks to buy or which stocks to watch should never be based on your personal feelings instead of cold hard data.

In other words, never fall in love! With with a stock that is. This may cloud your judgement and lead to seeing the potential of a stock through rose colored glasses, leaving you susceptible to losses.

Like anything worth doing, investing in penny stocks is not easy.

Even the hottest of penny stocks involves a high degree of risk which can only be offset with plenty of work, research and meticulous maintenance. Just because the word “penny” is in the name, doesn’t mean stocks under 5 are automatically cheap or no-risk; a loss is a loss is a loss. Protect yourself by going through the 9 aspects outlined above when pursuing each and every stock to make sure you’ve done your homework and can invest with confidence.

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