Finding the best penny stocks can be fun, on condition that you know what you are doing.
The art of successful penny stock investing is to invest at the right time and select the right company. With proper penny stock training, thereby learning the true penny stock skills, this is quite possible.
You can invest only a small amount in order to make huge profits.
However, you should consider that there are risks involved when buying penny stocks. But not all small company stocks are risky. The trick is to manage risk, by carefully monitoring shares and their underlying companies. Penny stock training plays a major part in making you alert to cheap shares with potential. While you can make lots of money with the right penny stocks, it is also true that the number of small companies that will become giants are limited. Remember, the quality of the company quite often determines whether a stock will become a champion or sink into obscurity.
How long should you keep a penny stock before selling it? There are different views and strategies about this. Some penny stock experts keep stocks in their portfolios for six weeks to 18 months or longer. One view is to keep a penny stock for a period of one to five years to allow for a small company to expand and prove itself to investors. This is the strategy for people who prefer to invest in stocks for the medium or long term. You should therefore look at your investment plan, and see what your needs are. Sometimes you will need patience when a penny stock does not perform immediately. With decent penny stock training and honing your penny stock skills, you will become more and more aware of external factors that may be responsible for preventing a share from making progress.
A second way of thinking is to trade penny stocks actively, which means you buy stocks when they are cheap, wait for the stocks’ price to rise and then take profit by selling it. There is a method, called “stop loss” to give you an indication about when to sell. For example, if you implement a 20% trailing stop loss on a stock, that is your maximum downside on that stock. If it falls below that, you sell the stock. You should take into account that if you trade stocks actively, you may have to pay tax on the profits you have made from each share. This will depend on the tax laws in the country in which you live.
Apart from assessing the company (discussed in Finding the Gems), there are a number of factors concerning the stock itself which you should consider. When huge numbers of the penny stock you are interested in are held by a single individual or institution, you should rather stay away from that stock. Chances are very good that if you buy the stock, large scale selling may result from it. The price of the stock will subsequently go down and will not go up when a general upturn of the markets occurs in future.
Another point to consider is how many penny stocks you should buy. This will depend on your personal preference (the amount of money you are prepared to spend, the investment period you have in mind, etc.). Various studies have been undertaken to establish a pattern of growth among penny stocks. One such USA study has shown that on average one out of five small stocks fails, while one stock out of five grows to become a super stock yielding massive profits. Investing advisors and analysts thus argued that it would be wise to spread your stakes over a number of potential winners, instead of investing too much in one or two that might turn out losers. That means it would make sense to invest the same amount of money in each stock in your portfolio. The amount you want to spend, is of course related to this point. People tend to invest small amounts of money in penny stocks because they are relatively cheap. This makes sense, if broker’s fees and other transaction costs are not taken into account. But consider the following configuration of a stock transaction: If you invest $2 500 in a stock, your transaction costs will amount to approximately $100 for buy and sell. That implies a gain of 4% on the stock before you break even. So if you purchase only $500 worth of stocks, your costs will amount to over 20%. Thus, you will only break even after this stock has risen by 20%.
One word of advice, and this is really important: Make sure that you can afford to buy stocks, even if they are inexpensive. Buying stocks with borrowed money is risky, and should rather be avoided.
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