I’ve been there, when I was broke signing up for the “penny stocks list” and thinking how awesome it would be to turn $100 into $1000 and then $1000 into $10,000. 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. These 3 tips will help you lower the risk of one of the riskiest investment vehicles.
Tip One Does the company know how to make a profit?
While it’s 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 the company on the “penny stocks list” 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.
Tip Two Have an entry and exit plan - and stick to it
Penny stocks are volitile. When you read these penny stock tips from the penny stocks list, you really need to WATCH IT. 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 to your heart.
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.
Tip Three How did you find out about the stock? Be wary of the sources
Most people find out about penny stocks through a mailing list, or the so called “gold member penny stocks 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.
If you have play money you like to gamble around with then you can try gambling with penny stocks. However, if you are looking for a more legit way to invest and something that can help you become financially free sooner. Learn the investment strategy of the rich, the investing guru’s don’t read the penny stocks list. You think Warren Buffet reads it? He doesn’t even read the Wall Street Journal.
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. Penny stocks are risky to begin with, why put your money more at risk? Definitely do not use penny stocks from your emergency fund. It simply is not worth it.
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