A Simple Question With Many Answers When It Comes To Penny Stock Picks
The question itself is most likely as old as the idea of learning how to buy penny stocks. The short answer is: Yes! But there is a lot that goes into making money with these micro cap stocks. You’ve got to know the risk/reward factor and definitely need to be able to handle a lot of that first part; the risk.
In many cases, penny stocks can offer investors and day traders big opportunities to buy a boatload of shares in a stock that trades under $1 (sometimes even below $0.01) in return for a huge windfall. For those that can stomach insane amounts of volatility, keep reading.
Look at any list of penny stocks and you’ll likely have at least one in the bunch that will tank. You’ll also likely have a company on your penny stock list that will score big points. So it’s important to know how to navigate these waters.
Don’t Pay Attention To The Penny Stock Success Stories Too Much
Most of the time, these “get rich quick” stories are either fabricated or extremely rare. Trading penny stocks takes as much work, if not more work than investing in blue-chip stocks like Facebook or Twitter. The main thing is to be able to do the proper amount of due diligence.
Find out what insiders are invested in a penny stock, get a feel for who’s talking about the company, and find out what kind of recent news or corporate filings have been put out. Listening to “the guy that made $50k over night with penny stocks” is the last person you listen to.
Be Ready To Sell Penny Stocks Quickly
Most penny stocks are high risk for a reason. They are generally start up level companies and in turn, could fail at any time due to myriad circumstances. Access to capital being a big one. Nonetheless, it’s important to stick to your trading strategy and be ready to take profit at a moment’s notice. Most people don’t choose to invest in penny stocks but rather buy and hold for shorter periods of time; days, weeks, months.
Use Mental Stop Losses
Since many penny stocks don’t trade on a major exchange, brokers restrict certain features. Stop losses are one of them. In some cases where penny stocks are listed on the NASDAQ or NYSE, you can enter a stop loss that will trigger a sell order once a certain penny stock hits your mark.
But for penny stocks listed on the OTC, this feature is usually not able to be used. For this reason, it’s important to mentally place your mark on a given penny stock. If a stock is trading at $0.10 and you say, “I have to cut losses if it gets down to $0.07,” that is your mental stop loss.
Scale Your Penny Stock Positions
It’s also important to note that buying penny stocks doesn’t have to be an all or nothing event. Smart traders will scale into a position over time rather than buy a whole bunch of shares at once. This not only helps protect against large losses, but also helps keep a trader in a winning trade longer.
As a rule of thumb, experienced traders will enter positions with a small “starter” and then scale into or out of a trade depending on how it is performing. Everyone’s trading strategy is different so stick with what you know. But it may be something you want to look into at some point.