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Investors have the tendency to join in the gold rush in the hopes of making a killing in the market. Conversely, they also have the tendency of being overly cautious to the point of missing out on legitimate opportunities.
Penny stocks – a double-edged sword
Perhaps there has never been a more fitting scenario where both extremes are played out than in penny stock investing. Penny stocks have a lot of negativity surrounding it and for good reason. Their unusually low price is enough to turn regular buyers into skeptics.
However, if big players like True Religion and Monster Beverage are any indication, these stocks can’t be all that bad. Yes, they’re risky, more so than most stocks out there, but they can be quite rewarding if you know what you’re doing. Read on and learn some tips for more successful penny stock investing techniques.
What are penny stocks?
Penny stocks are common stocks that generally cost less $5 per share. They are sold by startup companies that are seeking capital, hence their unusually low price. As you can see, these companies have the potential to hit it big…or to crash and burn.
Due to its lower trading volume caused by minimal price and limited market cap, this stock is often the target of different kinds of manipulation. An example of this is pump and dump fraud where the price is inflated through devious and misleading statements.
One is well-advised to adopt the same analytical approach that you use when investing in established companies. This helps you to identify the risks and to scientifically gauge if a prospective stock is worth your precious dollars.
Some investing gurus say that using mainly a bottom-up approach as the main technique with a high level top-down design generally reduces the risks irrespective of the market cap. It’s an excellent combination that has worked well with some buyers who dabble with penny stocks.
Don’t get intimidated by the risks involved in a budding company. Dig deeper into other critical factors that shape its future such as the bargaining power of both the customers and suppliers and how it stacks up against competitors. Take note of emerging products that threaten its marketability. It takes ground level analysis to see the big picture.
Know when to cut your loses
Be alert for possible signs that your investment is tanking. Pull out as fast as you can when you begin to sense a downturn. This way, you can cut your losses before it all disappears completely.
You can play around with your initial winnings, but always stick with the fundamentals. No one can exactly know with pinpoint accuracy what the outcome will be. Make sure to check the merits of the company and its profitability.
Have the proper mindset
It really is a gamble when it comes to penny stocks. Every step of the way is a learning opportunity, so don’t get too worked up with failures. Be flexible, expect the worst, and always be on the lookout for the next big thing.