Penny stocks have an undeniable allure to them. Because they are so cheap, an investor could feel like buying up thousands of stocks and waiting for them to rise dramatically. However, this would actually be a very risky move. This is because, in exchange for a low price, penny stocks lose their security on the market.
You may feel like you could get a massive return for a small investment, and this COULD be true. However, the chances of this happening are actually quite small. In fact, unless you invest in the right companies, you could end up losing far more than you gain.
A lot of companies pay spam email providers to send out mass messages with falsified information. They tell you that if you were to invest in that company you would win big. However, the chances of this happening are actually very small. Refrain from rushing in and buying up all the stocks that have been hyped up by other sources.
You could improve your chances of winning by following a few guidelines, or tips for spotting right stocks. These are purely advisory tips to help you become a wiser investor. It cannot be stressed enough just how risky rushing into an investment could be without planning.
Check out the ‘guidelines and warnings’ that follow, and may the Force be with you. 🙂
Common trading mistakes
- 100 pennies are easier to lose than a 100 dollar bill.
This may not seem relevant, but it is. A lot of prospective investors prefer to buy up a lot of penny stocks instead of a few high-value stocks. Take, for example, two companies with the same market cap (say $10 million). If one company (let’s call it Enterprise) sells stock at $0.10, and the second company (the Millennium Falcon) trades at $100, a rookie investor would think that buying 10000 shares in Enterprise would pay off far better than Millennium Falcon.
This is a mistake. When trading in stocks, be sure you take a look at the outstanding shares as well. This is the number of shares each company has to offer. For example, even though Enterprise has cheaper shares, it could have far more available shares than Millennium Falcon. This would result in low quality shares if you invest in Enterprise.
First Tip – Look at share value AND outstanding shares.
- Watered down beer just tastes BAD.
More irrelevance, you say? An unstable small company with penny stocks usually releases more shares to the public in order to raise their capital. This means that the price of an individual share will actually drop. This means you actually LOSE money. So make sure that you check up on how stable a company is before investing, no matter how appealing their stock seems.
Second Tip – Share Dilution is your mortal enemy!
Keep in mind the two tips above when looking into investing in penny stocks. Make sure the companies you settle with are financially stable. Remember to check if the company relies on selling shares to earn capital. This will cause share dilution and you do NOT want that.
Look for the value of their current shares as well as outstanding shares. This is very important!
If you follow the tips above you are well on your way to independently select a company(ies) to invest in penny stocks with.
Tips to avoid bad investments.
- Avoid companies advertised on social media
Do not listen to the hundreds of advertisements promising huge returns on your investments on social media platforms and e-mail! Most of these advertisers have been paid to hype up the company beyond what it really is. Investing in companies like these are a sure-fire way to make a bad investment.
- Read the small print
When you have invested in penny stocks or are about to, you may get free newsletters to your email. These will tell you to sell, or may tell you about an explosion in stock value. DO NOT LISTEN. Almost all of these newsletters have false information. Read the small print at the bottom and you can see this for yourself.
- Sell fast and hard; do not get addicted.
When your share values goes up, SELL. Do not wait for it to rise even higher. Chances are it won’t. Values fluctuate constantly. As soon as your value goes up, sell fast.
- Invest in high volume stocks
Invest in companies that trade huge volumes of stock every day. These companies are usually more stable than recently emerged companies that trade in small amounts all the time.
- Limit you share volume
Try to keep a limit to the number of stocks you buy up. The less volume you have, the easier it is to make a quick escape if the stock value goes bad.
In addition to the above tips, just remember never to be too hasty when looking at penny stocks. Be wise. Do not be fooled by top level management gimmicks or email newsletters. Follow the guidelines as best you can and trust your brain over your heart.
May you live long and prosper.