Penny stock success is hard to come—but here are some tips to help you
Are you an investor interested in penny stock success? If you are, then it’s important to realize that the longer you invest in penny stocks, the likelier you are to lose.
All penny stocks rely on luck to become wildly profitable. If you play long enough, the “house odds” eventually triumph over any run of luck.
However, if you must invest in penny stocks, here are some tips for you.
The winning hand
It’s a bit like going to the casino, but you can do it with less risk. The odds are against most penny stocks—but with the right stock, the gains can be spectacular. Pat McKeough shows you how to increase your chances of uncovering a big winner. Get your free complete guide to investing in Canadian penny stocks.
Some investors look to penny stocks as a quick way to boost their investment gains. But while buying penny stocks can lead to a big payday when you make the right choice, the odds against your 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. Even if you want to take on that risk, you need to be extra careful about the penny stocks you do buy.
Beware of penny stock promoters while seeking penny stock success
Penny stock promoters love to make deals—however minor 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.
However, many penny stock promoters aim to make the deals seem bigger than they appear.
For example, when they get a deal with a major, promoters go to great lengths to make it seem more important than it really is. Instead of announcing that the big company has invested, say, $50,000, penny stock promoters may issue a press release that says the two companies have entered into a “multi-stage development plan”. The release may say the major has agreed to spend “up to $10 million” or whatever. It will usually provide a toll-free number or an online link for investors who wish to order the enticing brochures.
Main factors involved while seeking penny stock success
We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.
We look for well-financed penny stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
We like to see a strong balance sheet with low debt. Even better, we like to see a major partner who can finance the mine, software and so on to production.
We want to see experienced management with proven ability to develop and finance a new business.
We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
We compare the market cap of the stock with the estimated value of its mineral reserves, future product sales and so on. Some pennies need to find a mine, or successfully market a lot of their software, or other products, to justify the current share price and avoid collapse.
Buy penny stocks as a small portion of your portfolio, if that
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.
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.
Ultimately, penny stocks should always be a small part of any diversified portfolio. You should only buy them with money you can afford to lose.
Do you dream about penny stock success, or have you found penny stock success already? Share your experience with us in the comments.
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