If you’re interested in dipping your toes into the world of penny stocks, here is a rundown of the 10 essential tips to help you get started.
Run a paper portfolio.
This is a strategy used by fund managers to test out a new portfolio before they launch it. It’s quite similar to picking a fantasy football team. You put up an imaginary amount of money to play with, pick the kind of stocks you would consider trading, take note of which ones and when you’d have bought and sold and at what prices, and then wait to find out how your investments perform. There are a number of trading platforms that let you do this with features like a demo account of a virtual portfolio.
Learn from your Mistakes
As you start trading with real money, it’s crucial to keep a record of all the trades that worked, which ones didn’t, in order to become more successful in the future.
You don’t need to Necessarily Buy New Companies that Don’t Have a Track record
It’s better to look for companies that are cheap perhaps because they have hit a rough patch or are restructuring, because you might be able to make a decent amount in profits when the business recovers.
Find a Good Broker/Platform
Make sure that you broker offers a rich choice of stocks. In case you want to trade individual shares, keep in mind that fees can rack up rather quickly. Be sure to compare the charges across different brokers and find one with a cap on monthly trading costs or low fees per trade.
Avoid Unnecessarily Trading In and Out
This will certainly increase the fees charged, which can significantly erode your gains.
Do Good Research
Look for an experienced mentor who’d be willing to share their knowledge. Go through the various DIY penny stocks investing publications as well as the financial press, making sure that they are reputable sources. It’s fairly common for some unscrupulous people to use misleading information to talk up the share price of a company, before dumping their shares at a profit.
Quality Companies are Better Than Cheap Companies
As a penny stock trader, you risk getting caught out by value traps and boiler room scams if you fail to do good research. A company needs to be fundamentally a good business if it’s to have a good chance of performing well in the future. If a stock is cheap, ask yourself, is it because it’s a new company, a recovery story, or does it mean the company has little intrinsic value? Gold for instance has intrinsic value and that’s why the top gold penny stocks are well worth looking into.
Spread your Risk
Never try to pull big wins by piling all your available cash on a stock you have a hunch or heard is headed for greatness. Having smaller investments in a wide range of companies can lower your potential for losses and improve your chances of generating a good return.
Admittedly, your liquidity will be much lower than the main market, since there are fewer players in the penny stocks market. You should ideally look for companies with a few hundred thousand shares traded daily, to make sure that you can trade when you want to.
If you set a buy limit, stick to it. It’s very easy to be carried away, which can end up costing you more for the stock than it’s worth. when your stock is doing well, don’t be afraid to take some profits, but don’t settle for less than the best possible price when you want to sell.
Remember that penny stock trading is not a get-rich-quick scheme, though some people will claim to have the ‘secret sauce’ to make millions out of it. However, you can have lots of fun learning how to trade penny stocks, and even if you’ll undoubtedly get some losses, you can as well get lucky and land a “ten bagger” along the way.