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You can still invest in penny stocks if you wish. The risks of doing so are high, but that does not mean they have to be off limits. In fact, you could make money from penny stocks or at least reduce the risks involved if you use a few basic strategies. Many of these are common sense measures alongside some more in-depth strategies.
Do Not Pay Attention to Success Stories
Have you ever come across some site discussing penny stocks and you hear someone report that he or she has made tens of thousands of dollars in trading penny stocks? This sounds like a great proposal and encourages you to want to invest in those stocks. The truth is that such success stories, as exciting as they are, are not always legitimate. The people who claim they have made big bucks on trading penny stocks are in the extreme minority. These are people who simply had a few lucky streaks. Sure, knowing what to find in a penny stock is critical if you are going to succeed. There so many risks and issues in the market, sometimes luck is more important than just looking up information on what is available in the market. Therefore, you should never assume that those success stories are going to come true for you.
Don’t Hold Penny Stocks Too Long
Decide how long you are going to hold your penny stocks. You never know when something is going to change at a given time and can shrink in value quickly.
Look at how Glance Technologies stock has changed over time. GLNNF had a value of $1.40 around the beginning of 2018, but that stock fell fast to 60 cents in about two months.
Many people buy massive numbers of shares in penny stocks, and it is no surprise that people could experience sizable losses. After all, many might buy a great number of penny stocks because they are cheap and that more has to be purchased to make a decent profit. When someone holds a stock for too long, that person is at risk of experiencing massive drops in the stock’s value.
It is perfectly fine to buy and sell a penny stock the same day. Whatever you do, avoid holding onto that stock for more than a few days. There is always a chance that you might lose more than what you might gain. The smallest stocks should always have the smallest holding periods.
When to Sell
A good strategy for selling penny stocks is to sell them when you have a 20 or 30 percent return. For instance, buying 100,000 shares of a stock at $0.01 and then selling them at $0.012 is great as you will go from a $1,000 total to $1,200. This is an ideal 20 percent return. Some investors might hold the stocks with the assumption that a stock could really move forward. Someone might assume that the same stock at $0.01 will move up to $0.1. It would be extremely difficult for the stock investment to go from $1,000 to $10,000. It would take a very long time for this to happen even if it did. Of course, smart investors will have sold their shares when they reach a 20 or 30 percent gain threshold anyway, thus making it next to impossible for the stock to actually make that huge increase.
On a related note, you should try to have a stop order added to your transaction to keep possible losses from being a threat. Then again, some brokers might not actually offer such orders on penny stocks due to the extended risk associated with them. The risk of a pump and dump event might make it so the actual value goes well beyond whatever your stop order was for; you don’t want to have a stop order at $0.1 only for the stock to fall to $0.06 at that time.
Watch Company Information
Some companies might state that their stocks are growing well. However, company management might skew their documents toward the more positive things about a stock. They might also inflate some of the positive stories to make them sound more exciting and worthwhile than they really are. Companies are not necessarily required to tell you certain things about their stocks. They might work very hard to make their stocks more intriguing to you without revealing anything of real substance. Always take anything that a company says about its stock and how the company is changing with a grain of salt so you do not fall into any investment traps.
Choose Stocks With a High Volume
The next tip is to stay only with stocks that feature a good trading volume. These are the stocks that people are actually buying. These might include stocks that are traded by many people, thus reducing the risk of a pump and dump scheme on a stock. Anything with a trading volume of at least 100 million is always worthwhile. This means that at least 100 million shares have been traded within the last 24 hours of trading.
There is one major caveat to this tip. You have to look at how the volume changes based on what is shown on the chart read-out for a penny stock. For instance, a chart might show one or two massive spikes in the price of a stock. This means that one person has controlled much of the trading. Of course, it could also be a sign of a pump and dump attack.
Any stock with a trend line or chart that is a little more varied and does not have lots of odd shifts in its value is always easier to trust.
Avoid Trading More Than Needed
The specific number of shares of a penny stock that you could buy could be limitless. While you might be encouraged to buy a million shares of a stock at a value of $0.0005, and that could actually be a serious risk. You would spend $500 on an investment that could go south rather quickly if you are not careful.
Instead, try and keep your penny stock investments from being more than just a hundred dollars in value. Staying with 100,000 shares at $0.0005 is a better idea. You would only be spending $50 on your trade, but at least you are not going to lose a lot of money if the stock decreases instead of increasing as you anticipated.
Never Sell Short
Selling short sounds like a great idea when you think about it. You can borrow shares of a penny stock that appear to have been pumped up, sell them and then buy those stocks back for a sizable profit. The truth is that you could lose more money from the trade than what you might be able to afford. The time period for a short sale might be far too long for a penny stock.
Review Your Position
Look at how your position is organized based on the size of the stock’s volume. Never trade more than 10 percent of that stock’s volume. You would end up inflating the price of the stock if you did this. Investing far too much at a time only adds to your overall risk involved with the transaction. You need to be cautious when getting this part of a trade organized.
Remember when working with penny stocks that you are fully aware of what you are entering into in the process. Such stocks could prove to be dangerous and harmful to your investment plans if you are not careful.
