first of all let start with the simple question: What are penny stocks?
Learn everything about penny stocks. Are they great undiscovered companies, or dangerous scams? What are the benefits? Are penny stocks right for you?
1-Penny Stocks are a penny for a reason. While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker's money for an IPO. This doesn't make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.
2. Trading Volumes
Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn't trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding "dead money", where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.
3. Does the company know how to make a profit?
While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?
If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.
4. Look for chart in day trades and wait for half of a day to see the trend of any stock. If that stock goes up initially, short it and if that stock goes down, pick it at bottom (you can guess the approximate bottom of the day with some practice using daily up down averages). Even when this strategy doesn't work, the losses will be very small.
5. Profitable day traders recognize that penny stock trading is among the greatest ways to harvest BIG piles of cash in the stock market.
6. The problem is that if you don't know what stocks to look for and how to approach them while limiting your risk, you won't even get close to making some profits.
7. You don't necessarily have to trade hot small cap & micro cap stocks all the time. But you can learn how to take advantage of them when you encounter the best opportunities while at the same time limiting your risk.
8. Penny Stocks are among the most volatile and most manipulated form of investment in the stock market.
9. Have an entry and exit strategy. Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.
If your plan was to sell at $0.15 and it jumps to $0.16, either take the 30% gain, or better still, place your stop at $0.15. Lock in your profits while not capping the upside potential.
10.always have you risk managment plan intact. trade don't gamble