This seems like a loaded question right? Well, buying penny stocks isn’t just about having a few pennies in a brokerage account. It’s important to know a few of the rules of the road before you decide to jump into the world of micro cap stocks.
For the average investor, it is tough to find success in penny stocks without having a proper strategy. There are all sorts of factors the impact these lower volume, higher volatility markets and you need to keep your wits about you.
Whatever the case, you don’t want to bet the farm on your “buddy’s cousin’s stock tip.” Know what you’re getting into and learn how to move with the market. If you’re asking yourself, “What is a penny stock?” we have you covered. Click here to start with the basics (then come back to this article). If you already know the definition of a penny stock, stick around.
If you’re still here and ready to buy your first penny stock, you’ll have to get your “utility belt” put together. So here are some good rules for the road. This will also help you determine how much it will cost you to invest in penny stocks:
You’re Not An Investor, You’re Speculating
What does this mean? Most people who buy penny stocks aren’t in it to retire on their investment 20 years down the line. These people (possibly you) are here to make a quick buck and move to the next stock. On the contrary, an investor will usually put money into something higher priced, more established, and take a longer-term, buy and hold strategy.
Start Small
The beauty of penny stocks is that they are low price stocks. Generally speaking, anyone can buy a large position for smaller capital than it would take with a stock like Facebook or Twitter.
The usual observation is that penny stocks shouldn’t be more than 10% of anyone stock holdings. Of course, everyone has his or her own strategy. There are people who only trade penny stocks and make a good living doing so. It comes down to sticking to a proper strategy and knowing how to manage risk.
Do Your Research
This is one of the most important things to do. There are thousands of people online that will talk about penny stocks. There are newsletters that will report to their subscribers and there are even things you’ll get in the mail that speak highly about a penny stock.
Since you are the one who is ultimately going to buy penny stocks, it’s up to you to investigate beyond the hype. Look into corporate filings, read through news, dive into company management, etc. to get a real grasp on what kind of company you’re buying into.
