If you want to highlight an investment opportunity that is the very epitome of what risk and reward means, then you might struggle to find a better example than the world of penny stocks.
The chance for a trader to get the latest prices from Money Morning and then pick out the penny stocks that they think have a chance of soaring beyond their current valuation, is what gets many of them out of bed in the morning.
That’s ok if already have a handle on how to pick stocks successfully, but if you are new to the world of penny stocks, here are some tips on how to up your game and hopefully find a few winners as a reward for your endeavors.
Learn to ignore the noise and hype
If you really believed that you had uncovered an amazing investment opportunity in the shape of a seriously undervalued stock that was about to soar in value, would you happily share this information over the internet and spoil the chance of getting in at the right price?
The point about penny stock trading in particular is that there are always plenty of big stories and hot tips floating around, all of which are telling you to invest now while you have the chance and the price is right.
Penny stocks don’t come under the same regulatory restrictions and scrutiny that a company with a full market listing will, which means that you are instantly dealing with a scenario where trading is likely to be volatile, liquidity might be thin or even non-existent at times and not everything said about the company can always be backed up with hard facts that you can research.
To be a successful penny stocks trader it is important to learn how to ignore all the noise and hype surrounding a stock and instead, understand the risks involved in investing your cash in a company that doesn’t have to meet such stringent SEC filing requirements and could potentially fail completely.
There is absolutely no reason why you can’t successfully trade penny stocks, and many do, but you should approach your investing with your eyes wide open but your ears shut to the hype, so that you can clearly the see the opportunities and risks attached to each prospect.
Long or short trading strategy
The general purpose and thinking behind investing in penny stocks, is to go long, which means that you are buying a stock at a price that you believe will increase over a period of time, allowing you to sell at that higher price and make a profit.
Traders who consistently go long on penny stocks, and have developed a successful stock-picking strategy, can generate returns that often exceed 30% or more. If you are new to investing in this market, it is generally the better approach to take, as going short is a scenario that has a bigger prospect go badly wrong if you are a novice.
Buying short involves buying a stock that you anticipate is overvalued and therefore you expect the price of the stock to fall in the near future. You can short them by taking out a loan with your broker to buy the stocks, selling them back to the market at the lower price, and then pocketing the difference less fees.
If you are inexperienced as an investor and end up on the wrong side of your short stock trade, you may well learn an expensive lesson. There are obviously risks attached to buying penny stocks, which can fall in value or fold completely, but the way to look at investing as novice starting out, is to look at going long rather than trying to get smart shorting stocks.
Setting your own stop-loss limits
Successful investing is not just about picking the right stocks, you also need to have the discipline to know when to take a profit and when to cut your losses.
You should be aware that automated stop-loss limits are not always available for penny stocks in particular, so you may need to intervene manually when a price trigger is hit. The main point to remember is that you need to have the mental strength to take the right action when the limit on profit or loss has been reached.
Stop-loss limits are critical to your success in the long run, so make sure you have the mental strength and willpower to set a figure when you make the trade and take your profit, or accept your loss, when the target figure is reached.
Sarah Conway entered the world of micro trading with very little knowledge of what she was doing. But luck was on her side, with penny stock trading changing her life. Sarah now writes about penny stock trading for a range of blogs.