Some Tips for Trading in Penny Stocks

Budget Your Portfolio

Experts recommend that you shouldn’t invest more than 20% of your portfolio in penny stocks because of their unpredictable nature. They are the tiny yet feisty fighters of the stock world—sometimes they pull through and beat the odds, but other times they explode into a nightmare of losses. So, start small. Keep your penny stock investments low at first until you have seen how your picks perform.

Volume vs. Value

Of course you’ll be tracking the companies, but you need to know what you’re looking at. Just because a company’s trading volume is high does not necessarily mean that they are performing well. They could be trading in erratic spurts and stops, which aren’t good for your investment because everything could suddenly come to a halt, leaving you not-so-metaphorically holding the bag. (And the bag will be practically worthless.) What you need is steady, consistent trading volume with lots of trading partners involved in transactions. This means that a company is thriving and worth your time.

Don’t Dream Too High

Penny stocks are literally loose change, which makes them bad performers and practically worthless a lot of the time. If you’re going to try your hand at them, be aware of this. You are essentially dealing with the stock market version of a Vegas slot machine. Yes, big fortunes do happen, but the myth of big fortunes is much more common. Keep in mind that many penny stock companies are fronts for struggling, underperforming companies, and steer clear.

Does the company know how to make profits?

It is not unusual to see a startup company operating at a loss, it is important to examine why they lose money. Is it manageable? Will they have to seek other funding (due to a dilution of your hand), or will they have to seek a partnership that favors the other company?

If your company knows how to make a profit, the company can use this money to expand their business, increasing shareholder value. You need to do some research to find these companies, but when you do; you reduce the risk of losing your capital, and increase the chances of a much higher return.

How did you hear about this stock?

Most people learn more about penny stocks through a mailing list. There are many good penny stock newsletters, however, there are also many who are pumping and dumping. They, with insiders, loading up on shares, and then begin to pump the company newsletter subscribers unsuspecting. These subscribers are insiders buy sell.

Having worked in industry for the last 8 years, I saw my share of companies and unscrupulous promoters. Some are paid in shares, sometimes in shares (an agreement whereby the shares cannot be sold during a certain period of time), others by money.

How to identify good companies from the bad? Simply register, and track investments. Is there a legitimate chance to earn money?