| Investing in penny stocks provides traders with the | | | | and move down just as quickly. Remember, if you |
| opportunity to dramatically increase their profits, | | | | buy a stock at $0.10 and sell it at $0.12, that |
| however, it also provides an equal opportunity to lose | | | | represents a 20% return on your investment. A 2 |
| your trading capital quickly. These 5 tips will help you | | | | cent decline leaves you with a 20% loss. Many |
| lower the risk of one of the riskiest investment | | | | stocks trade in this range on a daily basis. If your |
| vehicles. | | | | investment capital is $10 000, a 20% loss is a $2000 |
| 1. Penny Stocks are a penny for a reason. | | | | loss. Do this 5 times and you're out of money. Keep |
| While we all dream about investing in the next | | | | your stops close. If you get stopped out, move on |
| Microsoft or the next Home Depot, the truth is, the | | | | to the next opportunity. The market is telling you |
| odds of you finding that once in a decade success | | | | something, and whether you want to admit it or not, |
| story are slim. These companies are either starting | | | | its usually best to listen. |
| out and purchased a shell company because it was | | | | If your plan was to sell at $0.12 and it jumps to |
| cheaper than an IPO, or they simply do not have a | | | | $0.13, either take the 30% gain, or better still, place |
| business plan compelling enough to justify investment | | | | your stop at $0.12. Lock in your profits while not |
| banker's money for an IPO. This doesn't make them | | | | capping the upside potential. |
| a bad investment, but it should make you be realistic | | | | 5. How did you find out about the stock? |
| about the kind of company that you are investing in. | | | | Most people find out about penny stocks through a |
| 2. Trading Volumes | | | | mailing list. There are many excellent penny stock |
| Look for a consistent high volume of shares being | | | | newsletters, however, there are just as many who |
| traded. Looking at the average volume can be | | | | are pumping and dumping. They, along with insiders, |
| misleading. If ABC trades 1 million shares today, and | | | | will load up on shares, then begin to pump the |
| doesn't trade for the rest of the week, the daily | | | | company to unsuspecting newsletter subscribers. |
| average will appear to be 200 000 shares. In order to | | | | These subscribers buy while insiders are selling. Guess |
| get in and out at an acceptable rate of return, you | | | | who wins here. |
| need consistent volume. Also look at the number of | | | | Not all newsletters are bad. Having worked in the |
| trades per day. Is it 1 insider selling or buying? | | | | industry for the last 8 years, I have seen my share |
| Liquidity should be the first thing to look at. If there | | | | of unscrupulous companies and promoters. Some are |
| is no volume, you will end up holding "dead money", | | | | paid in shares, sometimes in restricted shares (an |
| where the only way of selling shares is to dump at | | | | agreement whereby the shares cannot be sold for a |
| the bid, which will put more selling pressure, resulting | | | | predetermined period of time), others in cash. |
| in an even lower sell price. | | | | How to spot the good companies from the bad? |
| 3. Does the company know how to make a profit? | | | | Simply subscribe, and track the investments. Was |
| While its not unusual to see a start up company run | | | | there a legitimate opportunity to make money? Do |
| at a loss, its important to look at why they are losing | | | | they have a track record of providing subscribers |
| money. Is it manageable? Will they have to seek | | | | with great opportunities? You'll start to notice quickly |
| further financing (resulting in dilution of your shares) | | | | if you have subscribed to a good newsletter or not. |
| or will they have to seek a joint partnership that | | | | One other tip I would offer to you is not to invest |
| favors the other company? | | | | more than 20% of your overall portfolio in penny |
| If your company knows how to make a profit, the | | | | stocks. You are investing to make money and |
| company can use that money to grow their business, | | | | preserve capital to fight another battle. If you put |
| which increases shareholder value. You have to do | | | | too much of your capital at risk, you increase the |
| some research to find these companies, but when | | | | odds of losing your capital. If that 20% grows, you'll |
| you do, you lower the risk of a loss of your capital, | | | | have more than enough money to make a healthy |
| and increase the odds of a much higher return. | | | | rate of return. Penny stocks are risky to begin with, |
| 4. Have an entry and exit plan - and stick to it. | | | | why put your money more at risk? |
| Penny stocks are volitile. They will quickly move up, | | | | |