If you’ve gotten started investing in penny stocks, congratulations. You’ve taken an important step toward financial independence and toward building a portfolio that may afford you the opportunity to maintain your lifestyle in your golden years without having to make sacrifices or otherwise cut financial corners…or have you?
Unfortunately, too many penny stock investors make the mistake of thinking that their work is done once they’ve completed their research, identified their target picks and placed their buy orders with their broker. What these investors fail to grasp is that their job is only half done, because now that the shares have been purchased and added to their portfolio, the portfolio must be properly managed…and it can’t do it by itself. Effective portfolio management—including the divestiture of nonperforming holdings or the sale of equities at their peak (in order to maximize profits) or on the downtrend (to minimize a coming potential loss)—is a skill that requires patience and practice, but which is crucial to your bottom-line investment success: the successful selling of your penny stock holdings is equally as important as was their purchase.
In order to achieve optimal results when cashing out your penny stock investments, you’ll need to approach the task with the same structured organization as you approached the research and purchase function. At the most basic level, you should define your goals when cashing out, and devise and implement a strategy delineating how you will attain the goals you’ve set.
To define your goals, ask yourself why you’re interested in divesting yourself of your penny stock holdings. Are you liquidating in order to address a financial hardship, or to fund a major purchase such as a down payment on a house or car? Perhaps it’s time to pay Junior’s college tuition? Are you cashing out all, or only a portion, of your portfolio? Identifying why you’re interested in cashing out is important, because your capital needs will direct your selloff strategy in terms of timing and methodology. If, for example, you’re experiencing financial hardship, you’ll be seeking to dispose of your shares in as quick a manner as possible; if your holdings in any one small-cap company are significant, the sudden selloff of a large block of shares may be the catalyst for a downturn in share price, such that due to your own selling activities your last sales may be at a price lower than your first sales—but you may have no other option, and so no choice. If, however, you’re in need of funds for something that you’re capable of planning for well in advance, then you’re perfectly positioned to implement a strategy that allows you to divest yourself of your holdings at optimal price levels over time without causing any negative effect to your own bottom line.
More common is the retail penny stock investor who’s not necessarily seeking to cash out their investments now, but rather, who’s simply interested in obtaining general advice about how to go about achieving the sale of his holdings.
Such investors believe that they require guidance, when in reality they require nothing more than the confidence that they are as capable of making their own sell decisions as they were of making their buy decisions. Every retail small-cap investor should always be on top of his portfolio at all times, fully aware of his holdings and their value. He should be following his stocks closely, paying equal attention to both company developments and to market trends. If your goal is to sell, then you should follow your holdings’ daily volume and share price particularly closely: if you’re aware from your research, from your communications with the company’s investor relations department and from your participation in reputable message boards and investor forums that the company has obtained a valuable contract, developed a new product which it will soon be bringing to market, obtained a crucial patent, formed a critical strategic partnership of benefit to the corporation, or otherwise has positive news in the pipeline which, when announced, will likely lead to increased investor interest in the stock, be certain to keep a close watch on daily traded volume and on the spread between the bid and the ask price.
If that spread narrows, indicating that buyers are increasingly willing to pay close to what sellers are hoping to receive for their shares, and if volume reflects this interest by trending upward in a steady fashion indicative of true interest (as opposed to some form of stock manipulation), then it’s time to chart that stock’s support and resistance levels to determine where the highest share price (resistance) may likely fall; this is the highest price at which you should cash out your shares. If that share price represents a 20 to 30% gain on your original buy-in price, take your profits and celebrate, because you’ve just achieved the epitome of penny stock trading success. Conversely, if the company appears to be going nowhere fast, and you’re interested in cashing out for the purpose of minimizing loss as opposed to maximizing gain, then follow the stock daily, paying particular attention to the previous day’s closing price as compared to the next morning’s opening price, and try to sell your holdings immediately the first time you notice that the day’s open demonstrates an uptick from the prior day’s close. It’s only stock, it’s not an expensive commitment (these are, after all, penny stocks), and your goal in selling is to mitigate loss, remembering that some degree of loss is to be expected and that tomorrow’s another trading day….and that the only thing worse than selling too early is selling too late.
What if you’re cashing out your penny stocks because you’re seeking to move your capital gains into alternate investments aimed at capital retention instead of capital appreciation? A good strategy for achieving this goal is to commit yourself to remove your original investment from your brokerage account as soon as you’ve made an equal amount through your penny stock trading activities, keeping only a balance in your account necessary to continue to pursue further penny stock investments. In other words: once you cash out, move your funds out of your brokerage account and into a different investment vehicle. Get into the habit of regularly moving certain amounts of profits out of your account and into other asset classes as soon as they’ve accumulated in your account at pre-set levels; after all, what’s the point of cashing out if you don’t take steps to protect your newly-minted profits?
Understanding the motivation behind your desire to liquidate your penny stock holdings allows you to pick the best strategy for achieving your goals. Whatever your goals, and whatever your chosen strategy, avoid selling off all of your portfolio at once, because continuing to make intelligently-researched penny stock investments is the best way to ensure continued profits.
