Investing you funds in penny stocks may lead to a quick windfall but it may also lead to steep losses. It is vital to keep this in mind so that you don’t think about this a quick-rich method but a feasible strategy to accomplish your financial goals. Be Cautious about the Penny Stocks Companies
Penny stocks are dirt-cheap compared to the blue-chip stocks for a reason, or , for plenty of reasons. For one thing, these companies are start ups that stand on shakier grounds than most established companies in these recessionary times. For another thing, these enterprises may not have sound business designs that justify I.P.O investment. As such, it pays to do your research before investing in the company’s penny stocks. Never depend on hot tips & insider information either since these are deceitful ways to encourage investors to put funds in a sinking boat.However, you ought to not dismiss a penny stock company operating at a loss. You require to select the reasons for those losses, the capacity of the management to turn the company around with an infusion of new capital & its standing in the business community, among other considerations. Again, this is where your due diligence comes is necessary.
Look for Consistent High Trading Volume among Many Traders You must look for consistently high trading volume in the penny stocks you are thinking of investing in. More often than not, the average volume is misleading as the highs in trading volume for a day can pull up the lows in the succeeding days. Also, you have to assess the quantity of traders buying and selling on the stocks. If it is just one trader doing the high volume, then alarm bells must be ringing in your head by now. And even when there are many traders on the floor, you must figure out the flow of trades. Too little or too much can be a bad thing for your investment.If you deem it unwise to continue investing in a company because of the lack of traders and trading volume, then unload your penny stocks. Sometimes its not prudent to simply be patient and wait for things to get better as they sometimes never do.
Formulate & Follow an Entry & Exit Strategy Whenever discuss entry & exit strategies the saying ‘Bulls make funds, bears make funds, but pigs get slaughtered.’ comes to mind. In short, be aware of trend, go long or go short (i.e. buy or sell short) but keep an entry cost point & an exit cost point in mind. In case you don’t think about the four ‘before’ you trade, you are likely to let emotions get in the way two times the trade is in action. Emotions & profits do not always mix well. You can take our word for it or learn this pricey lesson by yourself. Keep in mind - the penny stock market is highly volatile, so it pays to be prudent with what profits you are content with & what you can afford to lose.
One of the more important components of your entry and exit plan must be that your penny stocks must comprise only 10 percent of your total investment portfolio. You cannot place your portfolio at greater risk than is necessary and avoidable by placing all your eggs in the penny stock basket.
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