It’s a common misconception that penny stocks result in only penny profits. If that were the case, would people like George Soros and Warren Buffet be investing in microcaps? Investors like these spend hundreds of thousands of dollars in the process of making an investment decision and obviously they are looking for big returns. But let’s leave these gentlemen out of the picture – they live and work in a world very few other people do. The question is whether it is possible to become a millionaire by trading in penny stocks. The answer is yes – the internet is full of stories like that of James Connelly, a math student who created an algorithm that predicted which penny stocks would sharply increase in value in a short time. He turned $1,000 into $1,000,000 in just 38 trades. Many of the stories may not stand up to scrutiny, but people have made fortunes in penny stocks and have done so in a few hours. In January of 2010 the values of a microcap called Command Security Corp. rose by 970% in half an hour. How much would an initial investment of $1,000 have become?
Who Wants To Be A Millionaire?
Or rather, who doesn’t? But the stories of overnight success are few and far between and imagining that you can become one of them can lead you into taking foolish risks and losing your investment. It’s far safer to recognize the possibility of making millions out of penny stocks but also accepting that few actually achieve this result. The best thing you can do is to have a million as your target, but work towards it in small, more secure stages. If you make a million – great. If not, you can still make significant profits – enough to change your lifestyle for the better.
There is a pot of gold awaiting you, but is not at the end of a rainbow – it’s on top of a mountain and you need to plan your climb carefully and have the right tools at your disposal to have a chance of reaching it.
Planning And Luck
Investing in penny stocks requires more work than investing in blue chips. If you want to buy shares of GE, you know exactly what you are buying. With penny stocks, you are looking at a blank canvas and you need to paint a picture on it before you invest. And that means research.
Microcaps are rarely covered by the mainstream media. But newspapers, TV and magazines are a great source of general information on economic and industry trends that will give you valuable inputs on the conditions a company will function in. Even general news can be very helpful. Reports that the next winter will be very severe will boosts sales of home heating equipment and even a small player can expect business to improve. There are lots of newsletters that cover penny stocks and can give you valuable insights. In fact, a favorable report in a respected newsletter is often enough to get people buying the stock and push the price up. The more information you have, the better equipped you are.
But having information is not enough. You need to be able to analyze it. This is done in two ways. First comes fundamental analysis which involves studying the company – whether it is profitable, how it has been growing, how strong the management is and other issues related to the working of the company. This information must be related to market trends and the overall economic conditions to enable an investment decision to be made. Technical analysis is really a set of mathematical formulae that allows an investor to predict, with a fair degree of accuracy, the expected future movements of the share price. It is based on historical data (often hard to come by in the case of new companies) on factors like price swings, production constraints, past marketing problems and so on. These inputs will allow you to decide on buy and sell prices.
Once you feel you know enough to make an investment decision, be sure you will be able to monitor your investment. This means spending time online every day and having a market ticker installed on your computer. Penny stocks are prone to sudden sharp rises and falls and you do not have the luxury, that blue chips normally offer, of taking time to make a decision. A critical component of penny stock trading is agility – being on top of the news and making decisions quickly. There is a lot of software available that can automate a large part of the process, including automatic buying and selling of predetermined stocks at specific prices. While these may reduce the load on the investor, they do not function in a vacuum. Unless you are on top of things, you can’t program the software to respond as you want it to.
Let’s face it; there are no iron clad guarantees in the stock market. Who expected the oil spill in the Gulf and the effect it would have on businesses there? Bad luck can ruin the best of investment plans and good luck can turn mistakes into profits. Be aware of the risks and be prepared for losses – no one ever has a 100% success rate.
Be Realistic In Your Expectations
Penny stock trading is about percentages. A 50 cent stock that rises to 75 cents may not seem like much when compared to a $100 stock that rises to $110. But the penny stock has appreciated by 50%, while the blue chip only grew by 10%. Which $1,000 investment will earn you more?
Have a war chest ready, do you homework and spread out your investments. Be prepared for losses and do not let your profits carry you into high risk investments. There are profits to be made in penny stocks but be realistic in your expectations. As to becoming a penny stock millionaire, other people have done it. So who knows?
