4 Things to Keep in Mind When Considering Trading Penny Stocks

Everyone on the internet has read at least one get rich quick story from a person who hit the jackpot with penny stocks. Those stories may as well be lottery stories, since choosing the right penny stock is like purchasing the winning lotto ticket. Everyone can do it, but some people go their whole lives picking losers. Penny stocks are an inherently risky investment, but that doesn’t mean you should not trade them at all. As long as you understand the inherent risks with them, you could potentially see a very high return on your investment. Keep these tips in mind when trading penny stocks to help mitigate your risk.

Don’t Act on Impulse

This tip is just common sense when it comes to investing in any stock, but it’s doubly important with penny stocks. Be wary of any “hot tips” you receive in an email and follow-up on the reports yourself to verify them. You should have a clear investment goal in mind before you make your first trade and you should stick with that plan and any stop-loss plans you have. Don’t hold something past your exit point and don’t keep a stock that’s rising past your profit point unless you’ve already taken enough gains to cover the cost of the trade.

Volume is the Most Important Indicator

When choosing a penny stock, the volume traded each day should be a primary factor in picking your companies. When you buy a low-volume stock two things happen. You cause a massive spike increase in trading price if you purchase too many shares, and you may price yourself out of a buyer. Stick with penny stocks that trade at least 100,000 shares of volume a day to ensure there are plenty of buyers for your chosen exit point. Volume is the best indicator of a penny stock’s health, so understand how low and high volumes can affect a stock’s price movements.

Never Make Large Volume Trades

It can be tempting to buy tons of shares of penny stocks that are valued at under $1, but that’s a first-class ticket to shooting yourself in the foot later on. Penny stocks should be treated like a fine wine that is sampled and swished around in your mouth and never swallowed. Never trade more than 10% of the stock’s daily volume in a single trade as this can massively impact your entry point. Conversely, you don’t want to get caught bag holding with a ton of worthless stock in a company that just went bankrupt. Treat these opportunities like a small lotto ticket that might or might not pay off, but never get greedy.

Bankruptcy is a Real Risk

Small companies can issue a ton of stock, diluting their shares and turning them into penny stocks. This fact is one reason why seasoned investors consider penny stocks too risky of an investment because the company behind the stock has usually made poor decisions. Companies will hire stock promoters online to tout their company as the next breakout performer, hoping to entice people to buy into the company so earlier investors can cash out during the pump. Avoid penny stocks newsletters and emails online, since these are ripe with pump and dump schemes. Do your work to determine if the company is worth investment.