Penny Stock Brokers 4u

There are few investments in which you are as likely if not more than likely to lose your shirt than to make yourself rich than the risky gamble of investing in penny stocks. With a few penny stock tips you can at least reduce your risk to some degree but should still limit your investment to an amount that you can safely lose if things do not go as planned.

Since penny stocks are those that trade below $5 per share and are even often less than $1 they can be attractive to those with a small portfolio. They also often attract a certain type of investor, such as the one that equates the size of their portfolio from a number of shares perspective rather than total worth. This can obviously be dangerous. Although being able to say, “I own 500,000 shares of ABC stock” may sound more prestigious than “I own 50 shares of XYZ stock” it will mean nothing if spoken to an investor that recognizes the true value.

Another thing that attracts investors into penny stocks is that even a few cents worth of increase means a large percentage gain. For example, a stock that goes from $.10 to $.12 may only be $.02 but that represents a 20% gain thus a $500 investment just made $100. If a standard stock priced at $50 increases by $.02 it has not even made a ½% gain. However, you must also consider that if you own a $50 share that drops $.02 you will not be nearly as devastated as you would if your $.10 share drops to $.08 thus losing you a quick $100.

Thus, understanding the actual nature of penny stocks is your first tip. More to the point is that penny stocks are not for everyone and rarely does anyone that invests in penny stocks regularly consistently show a profit. The likelihood is that most will lose money, especially if one stays in them long enough. Much like going to a casino, the odds are not with the gambler, they are with the house. You may win today and you may win tomorrow, but you won’t win in the long run.

The second tip about penny stocks is to realize that because most penny stocks are not traded on the major stock exchanges they are not required to release audited financial statements. You may very well be able to obtain some records but they are just as the company as prepared them with no outside review. Thus, the penny stock investor does not have a verifiable way to determine the strength, weakness or even validity of a company prior to investing in it.

A third tip regarding penny stocks is that they have a reputation for fraud. It is relatively easy for companies or other investors to manipulate their share prices when all it takes is a small group of traders to buy a large block of shares to push a stock’s trading volume up thus making appear more in demand. Additionally, sometimes con artists will post an offering of shares for a company that does not even exist so they can grab a quick amount of cash and disappear. One way to spot these scams is to look at the officers – on scams they will either be names never before heard of or will show up over and over again on companies that have failed. Sometimes even a company that is legitimate can fail if a competitor or malicious entity starts a false rumor to intentionally drive the price down and drive the company out of business.

The fourth tip is in regards to trading volume and liquidity. Penny stocks are commonly less liquid than traditional stocks as there are fewer investors willing to take the risk on them. They can also experience a short period of high liquidity only for the chance to disappear soon and thus be impossible to sell your shares at that point. Looking at the average trading volume rather than just a snapshot will give you a better idea of how many shares are consistently changing hands. While it is far too easy to manipulate trading volumes in the short run, it is more involved to do so consistently thus you can be more confident that the stock is trading well if it does it for more than a brief period here and there.

A fifth tip is to have an entrance and exit strategy and stick to it. If you are buying at $1.00 and plan to sell at $2.00, then set your transaction up that way. Also set up a stop loss so you do not lose more than you are comfortable with. Too often an investor will see that $2 price come up and then rethink their position and decide to hold out for $3.00 only to see the stock become worthless while they wait for that extra $1. Do not let greed overcome sensibility. That is not to say that you cannot research the reason from a logical standpoint and then determine that the stock still has room to grow, but don’t do it just for the gamble of it. You are better to take your profits and move on to something else. And, rarely should you reset your stop loss – just as it makes no sense to grab at a falling knife, don’t think a share that is on its way down will recover if you keep holding it as that rarely happens.

Lastly, keep in mind that investing in penny stocks takes every bit as much due diligence as it does to buy a multi-million dollar commercial building; in fact, it may even take more as rarely does a commercial building become totally worthless which is something that can obviously easily happen with a penny stock. Be sure to learn everything you can about penny stocks in general and then find out everything you can about those that you plan to purchase. Once you have purchased shares be sure to keep watch over them as well. And, most importantly, do not invest in them at all if you are not completely comfortable with doing so.