Investing in penny stocks provides dealers with the opportunity to dramatically enhance their profits, however, it also gives an equal opportunity to lose your current trading capital quickly. These kind of 5 tips will help you reduce the risk of one of the riskiest investment vehicles.
1. Penny Stocks are a penny for a reason.
While we all dream about investing in the next ?microsoft? or the next Home Website, the truth is, the odds of you discovering that once in a decade accomplishment story are slim. These firms are either starting out and obtained a shell company because it has been cheaper than an IPO, or even they simply do not have a business plan persuasive enough to justify investment banker?s income for an IPO. This doesn?t make sure they are a bad investment, but it ought to make you be realistic about the type of company that you are investing in.
2. Trading Volumes
Look for a steady high volume of shares becoming traded. Looking at the average volume can be misleading. If ABC trades 1 million shares nowadays, and doesn?t trade for the rest of the week, the daily average will be to be 200 000 gives. In order to get in and out at an suitable rate of return, you need consistent volume. Also consider the number of trades per day. Can it be 1 insider selling or buying? Liquidity should be the first thing to look at. If you have no volume, you will end up having ?dead money?, where the only way of selling gives is to dump at the put money, which will put more promoting pressure, resulting in an even reduce sell price.
3. Can the company know how to make a profit?
Whilst its not unusual to see a new start up company run puzzled, its important to look at precisely why they are losing money. Is it workable? Will they have to seek further financing (resulting in dilution of your gives) or will they have to seek out a joint partnership that party favors the other company?
If your company knows how to make a profit, the company will use that money to grow their company, which increases shareholder benefit. You have to do some research to find these lenders, but when you do, you reduce the risk of a loss of your capital, and increase the odds of an extremely higher return.
4. Have an entry and exit program ? and stick to it.
Very cheap stocks are volitile. They will quickly move up, and move down equally as quickly. Remember, if you buy a stock at $0.10 and sell this at $0.12, that represents a new 20% return on your investment. A 2 cent fall leaves you with a 20% reduction. Many stocks trade within this range on a daily basis. If your investment finance is $10 000, a 20% reduction is a $2000 loss. Do this 5 times and you?re out of money. Maintain your stops close. If you get halted out, move on to the next opportunity. The market is telling you some thing, and whether you want to will or not, its usually best to listen.
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If your plan was to sell at $0.12 plus it jumps to $0.13, sometimes take the 30% gain, or better still, location your stop at $0.12. Secure your profits while not capping the upside potential.
5. Precisely how did you find out about the stock?
Many people find out about penny stocks through a email list. There are many excellent penny stock updates, however, there are just as lots who are pumping and getting rid of. They, along with insiders, may load up on shares, and then begin to pump the company for you to unsuspecting newsletter subscribers. These kind of subscribers buy while insiders are selling. Guess who wins here.
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Not all newsletters could be unhealthy. Having worked in the industry for the last 8 years, I have seen my reveal of unscrupulous companies as well as promoters. Some are compensated in shares, sometimes in restricted shares (an agreement wherein the shares cannot be sold for a predetermined period of time), other folks in cash.
How to see the good companies from the poor? Simply subscribe, and observe the investments. Was generally there a legitimate opportunity to make money? Are they using a track record of providing subscribers with great opportunities? You?ll start observing quickly if you have subscribed to a fantastic newsletter or not.
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One other idea I would offer to you is just not to invest more than 20% of your total portfolio in penny stocks. You happen to be investing to make money and sustain capital to fight another struggle. If you put too much of your current 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. Penny stocks tend to be risky to begin with, why place your money more at risk?
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