Mistakes To Avoid When Trading Penny Stocks
Saying that penny stocks are attractive investments is pretty much stating the obvious. They are cheap since the maximum price of a penny stock is $5. That means that the barrier to entry is very low and people with very little money can still afford to invest in them. And then, there’s the profit potential, which is absolutely amazing. Suppose you buy a stock for a dollar and it surges to, say, $18. That’s $17 profit for every stock. If you had purchased 500 of these babies, then that’s 500 times 17, $8,500 profit before commissions. Such a surge can happen in a matter of weeks, sometimes days. But don’t let the profit potential fool you; just like every other investment, high reward comes with high risk, and your penny stocks are as likely to explode as they are to fall, so you’re going to have to thread with caution.
Nevertheless, penny stocks open the doors of stock market investing to people who can’t or don’t want to invest in standard stocks. The beginners are especially prone to a couple of serious mistakes that can leave them with losses, so here are a few helpful tips if you’re getting started in penny stock investing.
First of all, as stated above, the price of penny stocks is capped at $5. Since they’re relatively cheap when compared to other stocks, it’s tempting, especially for beginners, to just focus on the profit potential and invest in just one or two stocks without doing proper research first. They feel like there’s little chance the price of the stock will go down, since it’s already pretty low. Truth is, research is crucial if you want to limit your losses, because it’s important that you know whether you’re investing in a good or bad company. Even more so than established stocks, your research on penny stocks is the key to making money, because they are not listed on the main stock exchange. So you’ll be dealing with companies that are less established and you’ll probably have to dig a little deeper to find the information that you’re looking for to make your investment decisions. The bottom line is that you should not invest one penny (pun intended) until after you’re done thorough research.
While we’re on the subject of research, pay attention to the sources you’re getting your information from. You’ll find plenty of websites willing to give you free advice, tips, tricks, suggestions, guides, and reports on which stocks to buy and which ones to sell. Always question their motivation for giving you said advice. Many times your instinct will alert you if something’s not right. Now we’re not saying that you should discount all the information you read, we’re just suggesting that you avoid letting other people do your thinking for you. If you do, the only people who will make money from trading penny stocks will be them, not you.
That naturally brings you to the next pitfall to avoid: thinking that making money with penny stocks is easy. Just like anything else that’s worth it, it will require that you spend some time learning it before you eventually master it. Some people get lucky and buy shares of a company that goes on to become an industry giant, and those shares turn those people into millionaires. But you need to understand that this is not something that happens all the times, and that the chances of it happening to you are pretty slim. Never get into penny stock trading with the assumption that you’re going to get rich overnight. Instead, try and use it as a source of income that you will grow over time to achieve wealth.
Make sure you don’t rely on a broker to help you pick your stocks. Your own decisions, instincts and research are what matters most. It’s YOUR money after all, and nobody cares about it more than you do.
While this is a fine list of mistakes to avoid, none of them can be more devastating than this final one: investing money you can’t afford to lose. Even if you follow every other advice, neglect this one and one mistake can wipe you out. Conversely, even if you ignore every other advice but this one, you won’t be ruined financially because you haven’t invested money that was critical to your survival and that of your family.
Always keep in mind that trading penny stocks is as risky as it is profitable. You can make a killing, or get killed. So before you invest in any specific company, be mentally ready to lose that money in case things don’t pan out. That’s not to say you can’t make money, because you can. This is simple, sound financial advice.