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Getting Started
The first step should be to consult our PENNY STOCK INVESTOR'S GUIDE, which has the very basics you need to understand penny stocks. There are a few other aspects of investing that you should know before getting started, and the most important one of those is that Penny Stocks are not like normal stocks. They climb fast or fall fast, and rarely do they move slowly up or down.
One more aspect that is necessary before beginning to invest is available cash flow. As enticing as stocks may be, do not risk more than you can afford. If you cannot afford to lose your investment entirely, you probably shouldn’t. Always think carefully and even consult financial advisors before investing in stocks.
What Are Penny Stocks?
Penny stocks are often considered to be stocks that are traded for under $5 a share. Penny stocks have become popular because of their potential to bring in massive gains with little investment (imagine a 10 cent share rising to $10.00). On the other hand, penny stocks have also been known to be unpopular due to the risks involved such as lack of corporate transparency and stock volatility due to stock promotion and pump and dump schemes.
Buying a penny stock is not unlike buying a regular stock; the main difference is that penny stocks trade on different market exchanges so one will need to know where their stock of interest is trading before setting up an order. Furthermore, penny stock traders are not slowed down by strict requirements when it comes to trading their shares.
Timing
Penny stocks move fast, and are not prone to long-term growth. More likely than not they rise fast and peak very quickly. This is when you can make the most, right before the stock dips back down. This can be sudden and you could stand to lose more than you expect if you stay in too long. Remember to always get out while you have a profit, you can’t always wait for the stock to rise again.
Don’t be afraid to cut your losses or pull out early. A guaranteed gain is often better than maybe earning only a little more. And all this comes down to timing. You’ve got to Get In and Get Out while you’ve made profits.
The Most Common Risks
Many armature investors will swear on the “Next Big Thing” or “The Next Google” and will try bringing everyone they know to invest with them. The worst thing an investor can do is to go in blindly and invest in the first thing they see. Investors should always do their own due diligence. The best way for this is to practice your research and make predictions without investing anything, just keeping track of where you think stocks will go and whether they did or didn’t.
Even if you’re new to investing, if you learn the value of research and spend time looking at companies before investing, it’ll be no time till you’re making money. And one of the first lessons an investor should learn is that of uncertainty. Stocks, even very promising ones, may take a hit or pull in losses, and you can’t be right all the time. So ALWAYS diversify and you won’t have to worry about taking hard hits so much. You wouldn’t want to sit on a chair with only one leg would you? Try splitting your investments amongst many promising companies in different industries and sizes.
Other Risks
Penny stocks are often high risk stocks. This is because they are volatile and they move quickly. A $0.10 increase might mean the stock rose 10% or maybe 100%. Small shifts in the industry or sector could mean a huge impact for penny stocks. They are more sensitive than larger companies, which makes them High-Risk and High-Yield stocks.
Beware what promotion sites and “Pump and Dump” sites are telling you. Pump and Dump means that a company or group is artificially raising the price and interest in a stock and then selling off many shares at a profit, and many investors fall prey to their trickery. Always do your own research and confirm what a website or person tells you. And even more than that, these sites and people may LEAVE OUT information that is vital. Be diligent with your research and you will learn to avoid simple scams.
