Topic: Penny Stocks

How to Buy Penny Stocks: Key Tips for Investing in These Speculative Shares

Investors wondering how to buy penny stocks need to avoid looking for a get-rich-quick stock and instead invest in speculatives with actual investment value

Penny stocks have appeal for some aggressive investors who aim to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.

However, these investors rarely find what they’re looking for. That’s because there’s a large random element in investing, especially at the ground floor. We consider penny stocks a gamble, but we do have some tips for those Successful Investors interested in how to buy penny stocks.

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How to buy penny stocks: Keep your investment small

When you buy penny stocks you could have a big payday if you make the right choice. But the odds against success are high. Penny stocks are almost always involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.

In general, penny stocks have lower trading volumes or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news will cause a penny stock’s price to rise or fall.

Penny stocks can be more easily manipulated than most stocks that trade on exchanges because of those generally low trading levels and resulting price volatility. Combine this with a lack of regulatory oversight on some stock exchanges, and the fact that these companies are easy to launch, and you can appreciate why investment frauds are more common with penny stocks.

Ultimately, penny stocks should never be more than a small part of any diversified Successful Investor portfolio. You should only buy the most speculative of them with money you can afford to lose.

How to buy penny stocks: Select stocks that are reasonably well-financed and have strong management 

You should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.

High-quality penny stocks should have reasonable sound balance sheets with low debt. It’s even better if they have a major partner who can finance the penny stock’s product to market or mine into production.

The best way to make money with penny stocks is to look for these criteria: If you’re investing in penny mining stocks, look for experienced management with a proven ability to develop a new product, finance a mine and so on.

How to buy penny stocks: Spread your penny investments out across different market segments including up-and-coming technologies

When picking penny stocks, we recommend investing in a range of markets. This includes software, biotech, technology, mineral exploration and so on.

To do this, you need to know how technology is changing. For instance, the immense popularity of wireless devices, like the iPhone and tablet computers, has stepped up demand for faster, more reliable wireless networks.

How to buy penny stocks: Avoid unscrupulous penny stock promoters

Penny stock promoters love to make deals (however tenuous or indirect) with major, household-name companies. The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.

When penny stock promoters get a deal with a major, they go to great lengths to make it seem bigger than it is.

In fact, when a penny stock shoots up on the news of big-company involvement, and the mineral property/unproven technology/revolutionary software is still in the early stages of development, it’s often a good time to sell.

How to buy penny stocks: Don’t play too long

In penny stocks or games of chance, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose.

That’s also why we think you should apply our sell-half rule.

Selling half your holdings after you double your earnings is a good strategy for any high-risk investment, but especially so for penny stocks.

This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly.

The reality is that it’s easier to launch a promising company than to create a successful business. That’s why only a minority of penny stocks ever go on to significant success. And while penny stocks can be a worthwhile addition to the aggressive portion of a diversified Successful Investor portfolio, as mentioned, you should in general only buy the most speculative of them with money you’re willing to lose.

Penny stocks can involve ‘pump and dump’ campaigns which lead to liquidity drying up and the price falling, trapping investors. How have you been able to avoid this while investing in pennies?

Penny stocks are a risky investment, but they can pay off. What characteristics does a penny stock need to have to make it something that you think is worth investing in?

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