5 Powerful Tips For Investing in Penny Stocks

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By : Allen TanOnline ??
Submitted 2011-09-14 22:25:44 Making an investment in penny stocks gives investors with the opportunity to drastically grow their income, however, it also offers an equal opportunity to lose your investing capital quickly. These five ideas will assist you to lower the chance of one of the riskiest investment vehicles.

1. Penny Stocks are a penny for a reason. While we all dream about buying the next Microsoft or the next Home Depot, the reality is, the probabilities individuals discovering that once in a decade success story are slim. These businesses are generally getting started and purchased a shell company because it was less expensive than an IPO, or they just don't have a strategic plan powerful enough to justify investment banker's money to have an IPO. This doesn't get them to a bad investment, however it should cause you to be realistic about the kind of company that you are investing in.

2. Trading VolumesLook for a consistent high level of shares being traded. Going through the average volume might be unreliable. If ABC trades 1 million shares today, and doesn't trade throughout a few days, the daily average will have to be 200 000 shares. To get in and out in an acceptable rate of return, you need consistent volume. Also look at the quantity of trades per day. Could it be 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you find yourself holding dead money, where the only way of promoting shares is to dump at the bid, which is able to put more selling pressure, leading to an even lower sell price.

3. Does the business know how to make a profit? While it isn't unusual to see a start up company run at a loss, its important to take a look at why they are taking a loss. Is it manageable? Will they have to seek further loans (leading to dilution of your shares) or will they are required to seek a joint collaboration that favors the other company? If a company knows how to make a profit, the company can use that money to cultivate their business, which increases shareholder value. You have to do some investigation to discover these companies, but when you do, you lower the risk of a loss of revenue of your capital, and raise the odds of a substantially higher return.

4. Come with an entry and exit plan ? and stay with it. Penny stocks are volitile. They will quickly move up, and move down in the same way quickly. Remember, if you purchase a stock at $0.10 and sell it at $0.12, signifying a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range every day. When your investment capital is $10 000, a 20% loss is really a $2000 loss. Do this half a dozen times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market industry is telling you something, and whether you prefer to face it or otherwise, its usually better to listen.If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits without capping the upside potential.

5. How do you find out about the stock? A lot of people find out about penny stocks through a mailing list. There are numerous excellent penny stock newsletters, however, there are in the same way many people who are pumping and dumping. They, along with insiders, will load up on shares, then continue to pump the business to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.

Not all newsletters can be harmful. I have worked in the industry for the last 8 years, I've come across my share of unscrupulous companies and promoters. Some are paid in shares, typically in restricted shares (an agreement whereby the shares cannot be sold for any predetermined period of time), others in cash.

How to spot the good companies from the bad? Simply sign up, and track the investments. Was there a legitimate chance to make money? Do they have a good reputation for providing subscribers with great opportunities? You'll start to notice quickly for those who have subscribed to an honest newsletter or not.

One other tip I might offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to generate money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you'll acquire more than enough money to generate a healthy rate of return. Penny stocks are risky to start with, why put your money more at risk?

Author Resource:- I can understand it's difficult to fully capitalise in penny stock. What if you are not making profits, but are on the losing ground? You need to learn and avoid mistakes make and capitalise and grow your investment. For more info on how to profit from penny stock, check this Penny Stock Trading Opportunities. There are options that you could invest in an online stock trading. I would recommend that you learn. Find out more from Day Stock Trading.

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