If someone tells you they have a great Penny Stock that has the potential to make an enormous return…run the other way!!! The investopedia.com definition of a penny stock is a stock that typically trades outside of the major market exchanges at a relatively low price and has a small market capitalization. These stocks are generally considered highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. Penny Stocks will almost certainly lose you money, however, if you still think a penny stock is a good investment for your current situation; follow the tips below:
1. The “Penny Stock” label speaks for itself!!!
While everyone dreams of finding the next Amazon.com (Symbol: AMZN) or Google.com (Symbol: GOOG) for under a dollar a share, the chances are it is slim to none. Penny Stocks are either companies that are just starting out/do not have a proven track record or a security that does not have the investment momentum to keep the shares afloat. This does not mean the company you are investing in is worthless, however, it should raise some red flags and make you understand that a very careful examination of the security should take place before making your investment. At the very least, you need to check yahoo.com/finance for up to date information on the security you are interested in purchasing. Look at the stocks vital signs like it's EPS (Earnings Per Share), Avg. Daily Volume, and the 52 Week Range (just to name a few) before you start investing in a penny stock.
2. Trading Volume tells a big story!!!
Do not trade penny stocks that have a low trading volume!!! These are very dangerous trades and can lead to your account getting wiped out. There is nothing scarier than expecting to get out of a trade but realizing that there are no buyers in the marketplace willing to purchase what you are selling at that price. Liquidity is a great starting point to examine, if you ever decide to buy a penny stock. Remember, if there is no or low volume, you may be stuck with a security you no longer want to be in. I can tell you from first hand experience, Penny Stock trading is some of the most dangerous investing one can do. Be careful and CHECK THE LIQUIDITY NUMBERS!!!
3. Have a plan!!!
Like I’ve stated in previous investmentmob.com articles, decide on a timeframe of your investment and by all means do some research on the stock before listening to that HOT TIP. Penny stocks are volatile, its commonplace that these securities can gain big and lose big on any given day. Deciding what type of investor you are (Day Trader, Swing Trader, or Long Term Investor) will give you a clearer exit strategy when it’s time to take those profits.