Many people ask me; Ev, I need to know how to invest in penny stocks. The short answer is, do as much research as possible. Doing a complete technical analysis of the stock company is the most important step when investing. When investing it is vital you make sure you are putting your money into the best possible penny stocks with the most potential for growth.
First you need to ask yourself if this particular stock is riding a 36-week high because of smart business practices or is it because it has recently been picked up by several newsletters and a team of traveling salesmen.
Don’t trust what the company management has to say! Don’t be content with letting company management do your research for you. The majority of small-cap stocks are scams created by insiders to reap profits by preying on naive investors. These are not reputable enterprises with growth potential and solid business practices.
The next step in learning how to invest in penny stocks is to choose a trading strategy. Without an overall strategy for trading, your investment in penny stocks will not be optimized for success. Think about how you will use buys and sells to gradually accumulate capital. The two main strategies are; “Sell-Quickly” and “Buy-and-Hold”.
- With the “Sell-Quickly” strategy don’t get greedy and look for a 1,000% return on investment (ROI). If you can make a 20-30% profit, consider selling before the stock takes a tumble.
- The “Buy-and-Hold” strategy is where you can take a cheap stock and keep it until such a time as it experiences a significant increase in price. While holding on to most stocks is a winning bet, holding on to penny stocks may be a losing proposition.
It is always a good idea to opt for high-volume stocks, especially in the beginning. Stocks that trade at least $10,000 in stock trading value or 100,000 shares per day are the only penny stocks liquid enough to be safe to trade. If you do find yourself the not-so-proud owner of a low-volume stock, you might find it very difficult to unload your stock when you want to or when life forces your hand. I recommend sticking with stocks priced at 50 cents or more per share. Stocks that are lower than 50 cents a share and that trade less than $10,000 in stock trading value or 100,000 shares per day are not recommended.
Look for stocks that experience an earnings breakout. Stocks that are riding 52-week highs due to product launches or a surge in market share are fair game if they trade more than 250,000 shares a day. The trick here is interpreting why the stock has experienced a breakout. If you suspect a pump-and-dump, steer clear! Look instead for earnings breakouts with actual market conditions to back them up.
When learning how to invest in penny stocks always remember to never trade based on emotions! Never fall in-love with a stock. You don’t want to get so attached to a stock that you fail to think rationally about its possible benefits or detriments. Stock trading is about recording profits. If you are not accomplishing this goal, it’s okay to step away from the trading table.