What You Don't Know About Penny Stocks CAN Hurt You

Penny stocks are very much like normal stocks apart from the fact that they are not traded on the major stock exchanges. Penny stocks are, by definition, stocks that are trading at or below $5 a share. The aim of trading penny stocks is the same as regular stocks: Try to buy low and then sell high.



Penny stocks are much more volatile than normal stocks and herein lies their chief advantage AND their important disadvantage. These stocks can (and do) double their price in just one day where it could take weeks, months or even years for a normal stock to do likewise. For some reason, it is far easier for a stock priced at one cent per share to multiply its price to two cents per share than it is for a stock worth thirty dollars a share to double its worth to sixty dollars a share.



What all of this means to the penny stock investor is a good news/bad news type of thing. Bad news first: Penny stocks can be so volatile that you could lose your total investment in no more than a single trading day. It’s nothing for a stock worth one cent a share to go to nothing quickly. Normal stocks are able to also go to nothing but they will spend a much longer time span doing it, giving the investor an opportunity to sell his or her position and keep a part of his or her investment.



You can easily be blind-sided by penny stocks if you are not watching closely with your finger ready on the sell trigger. These stocks don't always act as you would expect after studying up on the fundamentals of a company. In the world of penny stocks, one often sees good corporations going down and bad corporations going up.



The good news? You are able to make a large percentage increase quickly with only an insignificant amount of money at risk. And, while you can lose nearly all or all of your investment quickly, you won't be injured that much if you have only involved a tiny part of your entire net worth. Admittedly, risking just a penny and having two pennies tomorrow is not apt to change your life that much and so you may be tempted to try to double a much bigger initial investment. Because of the volatility of these stocks, you should never put down more than you can afford to lose.



How, then, can you shift the odds to your favor? It’s all about picking the correct penny stock and you may want some help there. Use professional stock picks from a reliable stock-picking service for a start. Make a list of the 10 best penny stocks from the stock picking service and then do your own research. List these ten stocks on a spreadsheet and build columns for company earnings, book value and such.



As mentioned above, penny stocks do not always function as you might expect from the fundamentals but much of the time they do, therefore going through the above exercise is not without value. Listing the 10 stocks on a spreadsheet gives you a chance to see easily which one of the ten is most likely to succeed. After making your buy, keep a record of the exact performance of all 10 stocks, including the ones you didn't buy. This will be a remarkable learning mechanism for you.



Benefit from your past mistakes. Try to comprehend what went wrong and why. Don’t commit the same errors again. Observe what other investors are doing and learn from their successes and failures. If the cost of a stock is low, attempt to find out if it is because it has not yet been discovered or if, rather, the firm is in financial trouble. Buy the first, never the second.



Whenever you have a massive win of one hundred percent or more, it’s time to sell all or a fraction of your holding in that penny stock. There are several ways to achieve this. You could sell fifty percent of your shares and let the other half ride or, instead, you could leave 1/3 in, sell 1/3 for cash in your pocket and sell then invest the proceeds of the final 1/3 in another, different, penny stock. Don't get greedy and hang onto a stock past its time. What goes up must come down and penny stocks usually do that all of a sudden.



If the stock keeps climbing after you have dumped it, don't worry about it. There will be another train leaving the station in five minutes. The whole idea is to purchase under-valued issues and then sell them before they become over-valued. Never purchase or sell for emotional reasons. Continually go by the numbers and work from your plan.



Finally, be careful about hot penny stock tips from promoters. Promoters purchase a penny stock and then try to get everyone else on the planet to purchase the same penny stock, thus driving the price up. Since they made their purchase before you did, they will make a 100% gain or more before you can really profit and will then dump the stock like a hot potato causing a sudden and unexpected drop in share value at your expense.



Bob Gillespie





About the Author:



Bob Gillespie writes on many subjects including penny stocks. He is a full-time Internet marketer and author who lives on the island of Maui in Hawaii. Learn more about penny stocks at Bob's blog at:



http://penny-stocks-picks.inetwyoming.com



Other blogs of possible interest:



http://forex-signals.inetwyoming.com



and



http://forex.inetwyoming.com