Trading penny stocks can be exciting, yet just as the volatility of a low priced stock can increase share value it can also be responsible for the decrease in value. These swings in stock price can be profitable, yet they can also be risky - causing investors to lose money. It is imperative to know what you are doing before becoming involved in trading.
It is well known that the potential percentages gained in trading over the counter investments can be substantial, but Wall Streets Hottest Stocks urges all individuals considering investing in these stocks to use extreme caution. Do not invest more then you can afford to lose. It is possible for investors to lose their entire investment when trading penny stocks.
Now that we've covered risk, and there is substantial risk, there are ways to minimize risk. Minimizing risk is the most important lesson to learn when becoming a successful trader.
Minimizing Risk
When entering an investment it is wise for an investor to ask themselves at what price they would sell the stock if it rises in price. At the same time they should ask themselves at what price they are going to sell it if the stock falls in price. Not all investments are going to be successful; cutting losses and exiting a bad investment is often necessary.
Knowing beforehand what prices an investor is looking to either take a profit or a loss enables that investor to invasion the situation before it occurs - chances are that one of the two will happen. Being prepared for this moment enables an investor to act quickly.
Volume
The volume is a good indicator to help determine the potential of an investment. Comparing the average volume with the current trading can indicate buyers and sellers. If a stock is trading above average volume and moving up then there may be more buyers than sellers. Conversely, if there is above average volume and the stock is moving down this may mean that there are either more sellers than buyers or that there are sellers getting out of large positions. Use caution; if a seller is liquidating a large position remember that the chances are you do not know how large this position is. If the position is large enough, there may not be enough buying to move the stock price up.
If a stock is trading larger than normal volume and it is not moving, more than likely this is a risky investment. In such a case it may be wise to not invest.
Float
The public float is the amount of shares in a company that are not restricted and can therefore be traded publicly. Many small companies have small floats. Companies with small floats can be highly volatile. With fewer shares available for purchase, smaller amounts of buying have the potential to increase the stock price. Companies with larger floats may require more buyers or larger amounts of buying to see their shares increase in value.
If there is a large amount of buying in a stock with a small float, this may be an indication of a high risk investment.
Taking Profits
Although it is possible for penny stocks to rise high percentages in value it is not always likely. This does not mean that investors cannot profit. If an investor owns a stock that increases 10% 15% or 20% in a short time, it may be a good idea for them to sell and take their profit. Not all investments are destined to produce large returns; learning to profit is valuable experience.
Emotion
Emotion may seem insignificant when investing; it is not. At all times it is imperative to remove emotions from trading. Often investors become emotionally involved with their investment. When an investor is up they often push their luck to try to get the most from the investment they are involved in, attempting to hold on long enough to sell at the high. Just as common is the investor who is down on their investment but they believed in the company, or for one reason or another are confident their investment will turn around to produce the gain they were looking for.
In both cases remember not to become emotionally involved. Be smart. If an investment reached the target price the smart thing to do may be to take the profit and sell. The tide could turn at any moment and the opportunity to take this profit may not last. If an investment is down, waiting for it to turn to a profit may not be wise. Taking a small loss early could prevent being forced to take a larger loss later.
Order Types
A market order is a "buy" or "sell" order requesting that the trade be executed at the market price. Using a market order will often ensure that the order is executed, yet you are unable to determine the exact price. When a stock is dropping quickly it may be wise to use a market order to sell as it may increase your chances of the order getting filled.
Limit Order: A limit order is a "buy" or "sell" order where the investor controls the "buy" or "sell" price. Often when entering a trade it may be beneficial to use a limit order to control your entry price; therefore enabling the investor to predetermine risk.
What Is a Penny Stock
"Penny Stocks" Definition:
a) common shares of stock that trade for less than five dollars per share,
b) stocks traded "over the counter" (OTC) through the Bulletin Board (OTCBB) or the Pink Sheets quotation system,
c) a stock the trades for less than one dollar per share,
d) a publicly traded company having few tangible assets,
e) a small cap stock, normally volatile, without a long trading history.
Even in defining the term "penny stocks" there are contradictions; depending on who you ask or where you look, definitions will vary. Corporations considered "penny stocks" can vary in size, duration of time traded publicly, liquidity, shareholder base, and share value.
Always exercise caution when investing in penny stocks.