Topic: Penny Stocks

How to Start Investing in Penny Stocks: Here’s how to cut your risk

How to start investing in penny stocks; Make sure the most speculative of them don’t make up more than a small portion of your portfolio. Here’s why.

It’s important to know how to start investing in penny stocks in the safest way possible—and here are some tips and pointers.


The appeal of risk

”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…” Get your free complete guide to investing in Canadian penny stocks.

 

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How to start investing in penny stocks: Begin with small amounts, 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.

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 portfolio. You should only buy the most speculative of them with money you can afford to lose.

5 tips for investors wondering how to start investing in penny stocks without risking everything

You could make money, but you will likely lose more often than you win. If you decide to start investing in penny stocks, below is a list of penny stock investment strategies you can use to make the most sound investment decisions.

  • Spread your penny stocks out across different market segments. When making a list of penny stocks, we recommend investing in a range of markets. This includes software, biotech, technology, mineral exploration and so on.
  • Look for a strong balance sheet when investing in penny stocks. High-quality penny stocks should have strong balance sheets with low debt. It’s even better if they have a major partner who can finance the penny stock’s production or mining activity
  • Focus on up-and-coming technologies. 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.
  • Buy multi-product penny stock companies. Technological advances come in spurts, and they leapfrog each other. Focus on investing in tech penny stocks that have some existing or soon-to-be-released products, and avoid one-hit wonders.
  • Look for earnings or at least positive cash flow. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.

Are you sure you want to know how to start investing in penny stocks?

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.

The longer you play with penny stocks, the likelier you are to lose. 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 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 portfolio, you should in general, as we mentioned earlier, only buy them with money you’re willing to lose.

Since penny stock success often relies in part on luck, is there any danger in relying on your gut feelings?

Penny stocks are risky, but they can pay off sometimes. What do you look for in a penny stock that makes it worth the risk?

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