Can someone tell me if penny stocks are a good investment and which ones should I look out for ? 5 Tips for Investing in Penny Stocks
5 Tips for Investing in Penny Stocks by Christopher Smith
Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles.
1. Penny Stocks are a penny for a reason.
While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker's money for an IPO. This doesn't make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.
2. Trading Volumes
Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn't trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding "dead money", where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.
3. Does the company know how to make a profit?
While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?
If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.
4. Have an entry and exit plan - and stick to it.
Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.
If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.
5. How did you find out about the stock?
Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.
Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.
How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities? You'll start to notice quickly if you have subscribed to a good newsletter or not.
One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you'll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?
Best of luck to you,
D
www.stockmysite.com There is a reason "penny stocks" are cheap...it's because, fundamentally, most of them (though not all) are completely worthless!
Think about it; When a company "goes public", they do so by offering shares for sale. The purpose in doing so is to raise capital by selling "little pieces" of your business ventures future. The better the prospects for your business model, the more you can charge per share at your IPO, or Initial Public Offering. After that, the market decides the price.
Sound business ideas typically IPO in the $10-$50 range. If a stock is priced under $5 (making it a "penny stock"), it has either fallen down to that level, or was never a sound enough business model to command an average "starting price"...
If you have $100, you'll do far better if you buy four shares of Pfizer or two shares of JP Morgan, or two shares of Citigroup (all of which will pay you regular dividends), than to spend your $100 on hundreds of shares of any one of these ~3000 "penny stocks".... Statistically, a couple of these companies will go on to succeed, the other 2998 will go belly-up. Can YOU pick the right two? I only allocate about 5% of my portfolio to penny stocks, simply because they're so risky. Over the years, I've made more money in them than I've lost, but well over half the ones I originally intested in went out of business. if hyou buy them in extremely large guantities mabye but remember never trust the stock market Penny stocks are not ideal for new/beginner investors. They are usually speculative investments and better left for the sophisticated investor/hedge fund investors that have vast sums of capital to handle any losses should the company go belly up. Most penny stocks are a good way to give away your money. All too often, penny stocks are the subject of "pump 'n dump" scam. A few guys buy many shares of a stock, and then create a huge demand for it by advertising the merits of the stock. "Can't miss; its price will go up 400% in a year" Blah Blah Blah. This is usually done by mass mailing of brochures and by brokers, often located in boiler shops.
When the demand goes way up, the price per share also goes up. Then these guys sell all their shares, and the price drops like a rock. Most people are then left holding a lot of worthless stock.
If you invest in penny stocks, you have to buy shares in 50 companies, and hope one or two will make money for you. Also, set a limit. When the price goes down 8%, sell it Ths is difficult way to make money at best, you can break even, most likey you will lose all your money.
You needlots of time to study the business. If you don't have the time stay away. if you can sell it later for a $100, it was a hell of a investment. Like the others have said, penny stocks are risky and many thinly traded. If you can't stand the thought of losing all your investment, stay away. I limit myself to about $500 per company. Check out companies on Pink Sheets where you can look at financial statements on line. You can follow links to the company web sites which can present a rosier picture than really exists. If you know how to read a financial statement, you will find some are truly frightening. An amazing number of "leading providers" of such and such look like they will be major contributors to increased bankruptcy attorney earnings soon. There may be a hefty gap between the bid (what brokers will pay you) and ask (what you will have to pay.) The bigger the gap, the riskier the stock. Because of the gap between bid and ask prices, you should plan on holding long term. |
