There are presently 1000’s of Penny Stocks available. But very few of them are genuine and capable of giving you good returns. However, smart traders have a few secrets up their sleeve for making consistent and regular returns from Penny Stocks. Here are their top 3 secrets!
#1 Diversification is NOT a must-have
When trading regular stocks, one of the key instruction that is regularly given is about the importance of diversification. It is always advised to divide your investment into multiple stocks.
However, in case of penny stocks, this advice doesn’t really hold true. Expert traders do not diversify their holdings in penny stocks. Instead, they focus on one or at most two Penny Stocks at a time. In fact, successful traders generally do not hold more than one stock at a time in their day-trading account.
So, why is it not advisable to diversify penny stocks? It is because diversifying a penny stock portfolio can be more complicated, expensive, and hurt your overall returns. For instance, the stocks which are your best ideas would be allocated at the same time, money, and effort as the stock which is a not-so-great-idea. If you had not diversified, it would have helped you gain more overall returns. The commissions and fees paid whenever you buy and sell penny stocks are also quite high. Selling and buying multiple penny stocks multiple times can rake up a good amount of money from your overall profits!
#2 Trade Your Style
According to expert traders, there are no hard and fast rules when trading penny stocks. Successful penny stock traders have been known to hold penny stocks based on their specific style of trading. Some hold it for 10 minutes, some for an hour, and some even for 6 months. They all have made money from penny stock trading, irrespective of the style of trading they followed!
This means that you do not need to mandatorily hold a penny stock for say, 1 month before you sell it off. You can sell the stock whenever the exit conditions of the trade are met. It is important to follow an accurate entry and exit in order to maximize profits and minimize losses. To know more about the entry criteria for buying the penny stock and exit criteria for selling the penny stock, you can check out our professional penny stock course.
#3 Knowledge Trumps Luck
Penny Stock traders who have been successful have one thing in common – they have spent time and effort to gain a very good knowledge of the stock market. This includes learning about technical analysis, chart patterns, fundamental analysis, candlestick patterns, overlays, indicators etc. Successful penny stock traders have admitted that they had started trading only after having a clear foundation of all these aspects of stock trading.
Expert traders first analyze the fundamentals of the stock, check the chart of the stock for upcoming price movements, figure out a clear entry and exit point, and have a stop loss for the trade before zeroing in on the trade.
Success in Penny Stock trading is more than luck – its hard work and knowledge!
Picking out a good penny stock involves a lot of effort. However, there are clear red flags which can help you to identify potentially bad penny stock investments. Understanding these red flags and taking the appropriate action can help you avoid significant losses. Let’s take a look at the top 3 warning signs.
#1 Promotions without Credible Reasons
Many times, market-watchers and investors may receive emails that promote certain penny stocks. They may also receive messages from hired promoters about endorsing the penny stocks.
If you investigate closely, you would notice that there may not be any viable reasons for promoting that penny stock –no new product launches, management changes, or products in the pipeline. Such excessive promotions without any credible reason to back it up is a clear red flag about the penny stock.
Interestingly, the stock may also start to surge ahead (with no apparent reason) at the same time. This increase in the price may entice novice investors to invest their money, thinking that it’s a real deal. However, these price increases are usually caused by the company executives and insiders. As soon as regular investors buy a chunk of this penny stock, the original promotors dump their shares and make profits while the genuine investors would lose money when the stock price free-falls soon after.
The general rule of thumb is that if you get the same tip at the same time from multiple sources – via (unsolicited) e-mails, phone calls, or social media, followed by a surge in prices, it usually indicates a pump-and-dump scheme in play. It is best to steer clear from that penny stock.
#2 Excessive Advertisements about the Involvement of Major Companies
Many times, penny stock companies form agreements with well-established companies of the same (or similar) field. This is usually a good thing.
But the red flags pop up when the involvement of the big company is exaggerated. For instance, if the big company had actually invested $25,000 for any program by the penny stock company and the press release from the penny stock company may say that the two companies entered into a “multi-stage development plan” with agreement to spend say, $15 million for the program, it is best to stay cautious about the penny stock company.
Remember that even if there is the involvement of any big companies, they have the right to drop out and cut their losses at any point they want. Therefore, it is not a really valid reason to buy the associated penny stock company.
#3 Penny Stock Companies Formed Before 2010
It is best to thoroughly research about any penny stock company that was formed before the 2010 Dodd-Frank post-crisis regulation. This is because, before this regulation, it was easier for penny stock companies to be set up as shells, get listed on over-the-counter markets and defraud investors.
In addition to these 3 major warning signs, there are plenty more tips to spot a potentially fraudulent penny stock company. You can learn more about those from our professional penny stock course.
Volatility and risk are inherent in penny stocks. But successful traders still manage to pick out the penny stocks that give profitable trades from the thousands of penny stocks available. Here are the top 3 signs that the penny stock is a potential winner.
#1 Sound Fundamentals
It is best to avoid penny stock companies that are in a sector that is prone to cyclical demand and political pressures. Before investing in a penny stock company, you must carefully analyze the fundamental factors of the company. This would help you to determine why the company is trading at the current price, whether the price is at a fair value, and whether the company has the potential for further improvement.
The fundamental factors that can help you to identify if the company is a good bet are: Company’s debt; Buyout potential; Cash flow; and Porter’s Five Forces of Competition which includes- Competition in the industry; Potential of new entrants into the industry; Power of suppliers; Power of customers; and Threat of substitute products.
A penny stock company with good fundamentals have a better chance of giving you profits.
#2 Good Stage of Life-Cycle
The phase of the life cycle of the penny stock plays a big role in how much reward can be made from the penny stock. There are 5 phases of the penny stock life cycle. They are Pioneering Phase, Growth Phase, Mature Growth Phase, Stabilization/Maturity Phase, and Deceleration/Decline Phase.
The initial phase called pioneering phase will have a lot of small-sized competitors in the space, low customer demand, and novel products and concepts. This is the phase when the stock price would be the lowest.
After this phase comes the growth phase. Here, the companies start to attract greater market attention and have increased sales and demands. This is also when the stock prices start to surge.
After the growth phase comes the mature growth phase wherein there would be an above average growth, but not accelerating growth. Then comes the stabilization/maturity phase wherein the growth is just average. This is followed by the Deceleration/Decline Phase wherein the growth declines as the demand shifts to other new products.
The maximum reward can be made when you invest in the penny stock is in the pioneering or growth phase and exit during the maturity phase.
#3 Sound Management
Since penny stocks are usually newer, smaller, and more speculative, management has a bigger impact on them when compared to other larger companies.
The penny stock companies with sound, ethical, and experienced management are more likely to succeed than the ones helmed by inexperienced and unethical managers. Most of the penny stock companies that had explosive price moves were led by superstar managers.
Good penny stock companies usually display the previous experience of the executives with their career highlights on their websites. It is best to choose the companies that have this information easily available and accessible than those without even a proper website.
We all know that penny stocks give one of the highest possible returns. But how much money do you need for getting started with the Penny stocks in the first place?
The answer to this question depends on 4 factors – Broker Requirements, Commissions & Fees, Your Financial Position, and your trading knowledge & experience.
#1 Broker requirements
If you plan on trading penny stocks, you would need to open an account with a broker. Depending on the broker you choose, the minimum deposit amount required varies.
For instance, if you open a margin account (which allows you to basically trade with the broker’s money) you would need to have a minimum balance between $500 and $2500.
Now, if you plan on becoming a pattern day trader (which is basically the name for the person who trades several times in a week for significant amounts), your minimum deposit requirement would shoot up to $25,000.
#2 Commissions and Fees
Depending on the type of broker you choose, your fees and commissions also vary. For instance, full service and discount brokers have different commission rates for trading penny stocks. These commissions can be quite expensive. So, it is best to include these commissions and expenses in addition to initial deposit necessary for trading penny stocks when planning your total cost.
So, total money for Penny Stocks = initial deposit for broker + fees and commissions.
#3 Your Financial Position
Some of you may be well off while others may be living paycheck-to-paycheck. The rule of thumb is that the money you plan to invest in penny stocks should not be got by compromising on your basic necessities. This means that you shouldn’t use your rent money for buying penny stocks!
It is also important to understand that stock market can be quite volatile. While it is possible to make money using Penny stocks, it is also equally possible that you would lose money. So, it is best to trade with the money you would be comfortable losing in case your trade is unsuccessful.
#4 Trading Knowledge & Experience
If you are a complete newbie to trading and investing, it is always best to learn the basics of stock market investing and familiarize yourself with the important terms and rules first.
In case you are an experienced investor, remember that Penny Stocks is a whole another ballgame. You would need the help of an expert in the field in order to understand the pitfalls and rewards of Penny stocks. This includes planning relevant stop-loss levels and understanding the different styles of trading like scalping and swing trades.
Remember that Penny stocks are highly volatile. They can give you double-digit returns in 2 months and also wipe off all those profits within just a week!
The amount of money necessary to invest in penny stock varies depending on your experience level as an investor. This is because experienced traders can make use of leverage and make good profits with very little initial investment. But leverage is not recommended for newbies at all, as you can suffer major losses without enough experience and knowledge about leveraged trading.
In short, you can get started with penny stocks for as low as $500, provided you have a good brokerage account, decent trading knowledge, and is not betting any money that you are not willing to lose!