Understand The Risk
Before you jump onto penny stocks, you need to understand the risks that are involved in trading them. Penny stocks are not like traditional stocks which are traded on the major markets and backed by established companies. These stocks do not have to maintain a minimum standard to stay on the OTCBB or the pink sheets and you need to consider this.
While penny stocks can be purchased for a low cost, you will still lose a lot of money on them when they go wrong. Many of the penny stocks that are listed, according to Investopedia, are scams or have no real value.
If you want to find true top quality penny stocks, you will need to spend a substantial amount of time researching them. There are some penny stock companies that will grow large enough to trade on the secure market, most will fail before they get this chance. Before you buy any penny stocks, you will need to ensure that you can afford to lose money and will not end up in debt due to bad trades.
Research The Companies
Once you have found a penny stock that you are interested in, you will have to thoroughly research the company and the market it works in to determine if there is any potential for growth. You will have to find all of this information on your own because these sticks are generally sold on unregulated markets.
To find the information that you need, there are a number of trusted sources that you can turn to including newsletters from reputable sources and trading groups. Financial advisors can also be helpful sources of information when trading penny stocks. Of course, it is important to note that many advisors will recommend that you not buy penny stocks depending on your financial situation.
If you are going to sign up for a trading group or newsletter, you will need to research them first and find out where their money is coming from. There are some newsletters that are scams which act as a front for penny stocks. These newsletters will recommend certain penny stocks in exchange for a payment form the stock owners. This means that you could be investing in penny stocks that are not a valid investment.
If you are unable to find any information on the stock that you want to buy, you should not buy it. Only put your investment money and time into a stock that you are able to verify.
Find A Comprehensive Stock Screener
The stock screener that you use should have a lot of filters that will help you with your trading. These filters should help you narrow down your selections based on the price of the stock, the trading highs, and lows as well as a set time period and trading volumes. A good comprehensive stock screener will be able to take a lot of the guesswork out of looking for a penny stock to trade in.
Penny stocks will very rarely make very good long-term investments. This is due to the fact that few will ever mature enough to be sold on the major financial markets. You should not hold onto the stock in the hope that it will become the next big thing. Instead, you should sell your penny stock once you have made a profit of 20 to 30%.
When you have a lot of these incremental growths, you will see your profits add up. It is important that you take your profits when they are available. You should never get caught up in waiting for amazing returns on your penny stocks.
Cut Your Losses
As with all kinds of stock trading, when you trade penny stocks there is a potential for loss. However, when you trade penny stocks, it is not recommended that you wait for the stock to bounce back because many of these companies are new or already in financial trouble. When a penny stock starts to turn down, you need to sell quickly. If you wait for a turnaround or a profit, you could end up losing your entire investment amount.
Ignore All Hype
While newsletters are able to point you in the right direction, you should never take advice on penny stocks without doing your own research. Before you buy any stocks that a newsletter or advisor recommends, you need to do your research and check up on the company. There are a lot of unreliable penny stocks and while there is no guarantee, a little research can go a long way.
Investing always carries a risk which is why you should never invest money that you cannot afford to lose. However, when you are cautious, penny stocks can make a profit.