Penny Stocks- Ways to Invest (part-1)

Penny stocks are low priced stocks listed by small companies. It is very easy to invest into these stocks as they don’t cost much and promise a big profits but trading these stocks is also a good way to lose money.

Although these stocks are low priced but low liquidity ensures high volatility. So, it is advisable for small investor to invest with cautious and get clear understanding of the company’s business and its financials.


Penny Stocks- Ways to Invest (part-1)

There are few rules listed below, can be followed while investing into penny stocks:

  1. Ignore penny stocks success stories: Investor must try to ignore the penny stocks success stories which are touted on emails, SMS etc. The investor must invest into penny stocks with caution and not play as a gamble and loose instead must focus on profitable penny stocks with solid earnings growth and those making 52 week high.
  2. Disregard the tips: The tips send via email, SMS, newsletter, fake press releases are just manipulations to sell those penny stocks rather than buy. Many big investors dump their stocks are high price by creating manipulations and trapping the small investors into it.
  3. Sell it Quickly: it is advisable for small investor to sell quickly if he is getting 20%-30% returns in just matter of few days rather than getting into greed to get more returns, because they are volatile and fall back more sharply.
  4. Never Short Sell: Investor must not short sell these penny stocks. Any positive news although fake can make stock shoot up 50% or even 100% in just a matter of few days and leaving shorting to pros.
  5. Focus high Trading volumes: These penny stocks are illiquid in nature. Focus on stocks which have high trading volumes on consistent basis rather than average basis. Consistent high volumes will ensure investor able to sell his holding any moment.

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Penny Stocks- Ways to Invest (part-2)

The ways to invest into penny stocks are continued in this article and they are as below:

  1. Don’t Listen to the Company’s management: It is advisable not to trust anyone while investing into these penny stocks. The companies are trying to get their stock up so they can raise money and stay into business. So investor needs to be cautious and follow the data from authentic source.
  2. Use Stop Loss: These stocks are illiquid and highly volatile. Investor need to put a strict stop loss trading into these penny stocks because they can fall and rise as much irrespective of the market sentiment. For risk reward in your favor, aim for 3:1 or 4:1 instead 1:1. It means if you target one dollar upside for a dollar stock than stop loss must be at 20 cents to be at better risk reward ratio.Penny Stocks- Ways to Invest (part-2)
  3. Buy the best of the bunch: An investor while choosing the penny stock must ensure the stock is on an uptrend. Better buy the stock which is trading at its 52 week high and that too at consistent high volumes. It is easy to find the stock fulfilling these two parameter but need to ensure that the stock is not a pump and dump scheme.
  4. Don’t trade large positions: Investor must be careful not to trade the penny stock in large quantity of shares. It is very easy to get in and difficult to get out of the penny stocks due to lack of liquidity. Investor need to ensure that not to buy more than 10% of the stock’s daily volume.
  5. Don’t love the stock, only Trade: Every penny stock company wants investor to think that it is an exciting story that will revolutionize the world. Most investors fall in love with the stock while it is going up and don’t sell them until it fall back.