“Penny-wise, pound-foolish,” goes the wise saying. While dealing in Penny Stocks, remember the basic rule-the chances of losses are abundant; the chances of success are moderate. The chances of great success are the rarest of rare. But investing in penny stock is worth the game if you play it well sticking to certain specific rules of this special game. Converting defeats in to victories is the art of the penny stocks.
Penny Stocks are defined as stocks priced below $5. They are traded at a very low cost, for even under $1, often for under a penny. Some of the tips for trading in Penny Stocks are:
- This is a high risk area. Prices fluctuate wildly at times without rhyme or reason that baffles the analysts.
- The investor can put small amounts in search of high profits. Study the company that you are going to invest.
- Collect reliable information about the state of affairs of the company. Is it an unknown company? Why it has remained unknown hitherto? Is it in a very serious financial trouble on the verge of bankruptcy? What are the chances of its getting additional resources if it has plans to recoup its original health?
- Try to get the information from insiders; if none from the management side is willing to divulge the information get it from trade union leaders, the vendors of the company etc.
- Get your information from more than one source; compare and cross-check it.
- Make assessment about the possibility of liquidity. Is it possible to exit easily? If your holdings are large, you may have to drag down the price further down to sell them.
- Penny stocks have many hidden pitfalls. Some artificial situations may be created by a group of investors, to get rid of their holdings of penny stocks. You need to cultivate the art of distinguishing between the genuine market trends and the cultivated ones that are designed to a plan by certain unscrupulous investors.
- The number penny stocks available for trade are many. It is not feasible for an investor to analyze the historical trends of the stocks of a company and identify the profitable opportunities. Certain computer programs are available which scan the stocks and identify the trading patterns of penny stocks, whether it is bullish or bearish. If such programs indicate that the stock is about to increase, further analyze such historical information. Since the computer analyses a huge amount of data, the results shown are fairly accurate, but take a well-calculated decision not the hurried one. The computer software, for sure, will not have any ulterior motives.
- Plan well. What budget you have allocated for penny stock trades? Further, calculate what amount you will lose if the stocks go down by 5% and you are compelled to sell short? How much that 5% would be in terms of cash? Estimate the potential gains on the basis of your research.
- Trends and the state of economy apply to all stocks, including penny stocks.
- The diversification rules apply as much to penny stocks.
- Penny stocks are more speculative than the high priced stocks. High risk is their nature.
- When the company is new, it has a competent management which is sincere about business development taking recourse to latest technologies, go for such penny stocks. Remember once Microsoft sold penny stocks for $2.50!
- Penny stocks are not listed in the stock exchanges they do not fulfill the minimum requirements. This is the major disadvantage.
To put it curtly, trading in penny stocks is a gamble. They are a high risk investment not worth the chase or purchase, unless you have developed a very specific plan.