Penny Stocks - What You Should Know Before You Invest
Investing in penny kinds is unquestionably high-risk, no matter what great 'tip' you might get or from whom. There are several rules any investor should follow, whether they are a novice or seasoned trader makes no difference when trading in the microcap arena.
Rule #1 - Never invest any money you can't afford to lose!
Let's face it, penny stocks are low priced for a reason. Usually the companies are in the early developmental stages with little operating history and their ability to continue as a viable business often in question. As a result, their trading can be sporadic at best and volatility should be expected. At any given time the company could potentially go out of business thereby leaving their shares worthless and in many cases a trail of investors facing losses.
Rule #2 - Look for companies with some trading history
The idea of getting involved in a newly traded issue may not work out as well as you'd like if no trading range has been established. Rather than thinking you may be getting a good price because the stock just began trading you may instead be blindsided with anxious sellers wanting to take advantage of any volume coming into the stock. Your best bet is to be patient. Make sure the stock has at least several months of a stable trading history. Although it is often difficult to determine the direction of a penny stock using the same technical indicators you would use with a listed issue it's best to miss a little bit of a move rather than getting caught in an avalanche of selling.
Rule #3 - Make sure the company has at least a few press releases already issued
The reality is that penny stocks trade primarily based on exposure - meaning how many people are finding out about the stock and how good of a story they have. If the company has at least a few press releases issued that usually means the management team is aware that sharing their story with investors is important. It is also an indication that they care about their share price and are actively working behind the scenes to accomplish the established goals of the company and do their best to create shareholder value.
Rule #4 - Do your best to avoid the 'pump and dump'
Although it can be difficult to determine if a stock is just be pumped up in price so sellers can blow out of their shares a good indicator is often a tremendous amount of volume coming into a stock with very little share price movement to follow. In some cases little share movement can be a result of a large number of issued shares and in other cases it could be an indication of a large seller with little regard to share price. Do yourself a favor and make sure you have access to a good Level II quote service so that you can watch what market makers are the most active in the stock you're considering buying. Then keep a close eye on how much buying is needed to have the share price trend up - if you see a lot of buying and very little movement take it as a red flag and steer clear of the stock.
Rule #5 - Subscribe to free stock alert services
There are many free alert services that are reputable and issue great picks from time to time. Begin following several companies and keep track of which ones are consistently picking winners. By doing so, you can minimize the amount of leg work on your end and, instead, rely on experts that have done their due diligence before exposing a company to their network.
Rule #1 - Never invest any money you can't afford to lose!
Let's face it, penny stocks are low priced for a reason. Usually the companies are in the early developmental stages with little operating history and their ability to continue as a viable business often in question. As a result, their trading can be sporadic at best and volatility should be expected. At any given time the company could potentially go out of business thereby leaving their shares worthless and in many cases a trail of investors facing losses.
Rule #2 - Look for companies with some trading history
The idea of getting involved in a newly traded issue may not work out as well as you'd like if no trading range has been established. Rather than thinking you may be getting a good price because the stock just began trading you may instead be blindsided with anxious sellers wanting to take advantage of any volume coming into the stock. Your best bet is to be patient. Make sure the stock has at least several months of a stable trading history. Although it is often difficult to determine the direction of a penny stock using the same technical indicators you would use with a listed issue it's best to miss a little bit of a move rather than getting caught in an avalanche of selling.
Rule #3 - Make sure the company has at least a few press releases already issued
The reality is that penny stocks trade primarily based on exposure - meaning how many people are finding out about the stock and how good of a story they have. If the company has at least a few press releases issued that usually means the management team is aware that sharing their story with investors is important. It is also an indication that they care about their share price and are actively working behind the scenes to accomplish the established goals of the company and do their best to create shareholder value.
Rule #4 - Do your best to avoid the 'pump and dump'
Although it can be difficult to determine if a stock is just be pumped up in price so sellers can blow out of their shares a good indicator is often a tremendous amount of volume coming into a stock with very little share price movement to follow. In some cases little share movement can be a result of a large number of issued shares and in other cases it could be an indication of a large seller with little regard to share price. Do yourself a favor and make sure you have access to a good Level II quote service so that you can watch what market makers are the most active in the stock you're considering buying. Then keep a close eye on how much buying is needed to have the share price trend up - if you see a lot of buying and very little movement take it as a red flag and steer clear of the stock.
Rule #5 - Subscribe to free stock alert services
There are many free alert services that are reputable and issue great picks from time to time. Begin following several companies and keep track of which ones are consistently picking winners. By doing so, you can minimize the amount of leg work on your end and, instead, rely on experts that have done their due diligence before exposing a company to their network.
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