11 Ways to Trade and Invest in Penny Stocks For Beginners - Ratinah

Ways to Trade and Invest in Penny Stocks For Beginners - Learn how to trade the penny stock market and arm yourself with these essential tips to increase your chances of success. If the world of penny stocks sounds appealing to you, don't worry you're not alone. 

11 Ways to Trade and Invest in Penny Stocks For Beginners - Ratinah

The fascination with the promise of huge returns with minimal investment has the power to cloud the vision of anyone with a dollar sign. Understanding how to trade penny stocks is very important in this market. The act of investing in penny stocks occurs less – so these stocks are held for a shorter period of time (where investment usually consists of long-term holdings). If you've determined that this sea of trading risk and speculation is right for you, here are some penny stock trading tips to really stay afloat in these waters.

Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. 

1. Penny Stocks are a penny for a reason

While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker's money for an IPO. This doesn't make them a bad investment, but it should make you be realistic about the kind of company that you are investing in. 

2. Trading Volumes

Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn't trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding "dead money", where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.

3. Does the company know how to make a profit?

While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?

If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an entry and exit plan - and stick to it.

Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best 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 while not capping the upside potential. 

5. How did you find out about the stock?

Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here. 

Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash. 

How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities?  You'll start to notice quickly if you have subscribed to a good newsletter or not. 

One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make 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 have more than enough money to make a healthy rate of return.

6. Choose your own stock

When doing your research on penny stocks, you are sure to come across some “big winners” that are ready to explode even higher. Ignore these tips because buying these stocks blindly makes you more vulnerable to fraud and misleading information. It also means ignoring the success stories you're sure to hear. You're better off taking the time to research and find the stocks yourself.

When you find a company you want to buy, don't jump right into it. Track the company for some time to get a better idea of ​​how the stock price is moving. Think of an entry price that you think is fair to enter. Once you get in, have a price out too. Know when you will sell your shares if they move lower, limiting your losses, and when you will sell higher and take a profit. You can even configure these transactions to occur automatically for additional insurance.

7. Don't be greedy

You can lose those 20%-30% returns as quickly as you make them. Stocks in the penny stock market can change course quickly and stocks that are slow to react are often allowed to sell their positions to reduce losses. Take your profits when you can and move on.

It's easy to sell a stock and then watch it climb higher and higher in the following weeks and months. The agony of watching this and thinking about what could happen will only cause you to overthink and make mistakes in the future. Once you've parted with the stock, move on to the next one and disconnect emotionally from the previous one. Only check in on stock prices for your own educational purposes but never second-guess yourself. When in doubt, always look at the number

From company management, from online sources, and even from your stockbroker, don't be afraid to guess. In the gloomy world of penny stocks, it is not uncommon for the parties involved to publish misleading information. Your job as a shareholder or potential shareholder is to take everything you hear with a grain of salt and confirm as much information as possible.

8. Keep long trades

THAT IS. don't sell short. Penny stocks are highly volatile and if you end up in a wrong short position, your losses can be quite significant. When you buy a stock, your loss is limited to your investment. When you take a short position on a stock, your losses can technically be unlimited as the stock can continue to rise. Large swings in penny stocks make short positions riskier.

9. Follow the volume

Stick to stocks that have a high number of stock trading hands each day. Too little volume and you can have a hard time finding buyers to liquidate your position. This is an unprofitable position when the stock is going down. The size of your position will also affect how easily you exit. Keep your positions relatively small with the average volume traded each day.

10. Learn the underlying company

Too often penny stock traders make their choices based on technical signals and forget about the underlying company. Look for solid earnings patterns and companies making new highs paired with strong fundamentals. There are many good companies listed as penny stocks that make good long-term investments. Companies like True Religion, Pier 1 Imports, and Monster Beverage have all been penny stocks looking to find their way.

11. Don't be an emotional investor

Never fall in love with stocks. This can cloud your vision of the stock's true potential leaving you vulnerable to losses. Even if you truly believe that this stock is a winner and have already recommended it to your friends and family, good investors are able to separate emotions from their investments.

That's 11 Ways to Trade and Invest in Penny Stocks For Beginners - Ratinah

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