Penny Stocks are affordable! Penny Stocks are exciting! Penny Stocks are volatile? Penny Stocks are risky.
The appeal of penny stocks is easy to see… small investment can bring big returns. It’s also a fast way to lose money. To avoid the many potential penny stock pitfalls, follow these tips to avoid the penny stock blindness that comes with the euphoric rush of buying a “good deal.”
Read the disclaimer
Promoters of the penny stocks must attach a disclaimer to their websites, emails and anywhere else they advertise the stock. Read the disclaimer carefully because often, they are being paid to distribute this material. That in itself is not necessarily a bad thing if they are also able to point to reputable resources who talk about the stock, such as Forbes or Wall Street Journal. But, if you are only able to find information on the stock from these paid distributors…. Be careful. If no one is excited about the stock except the people who are paid to be excited, something may be wrong.
Don’t confuse the exception for the rule
There are so many crazy success stories of penny stocks going to massive highs, bringing the investors a boat load of money. Don’t be fooled. Check out the stories again, and carefully. What was the initial price offering of those stocks? Is the price per stock based on the price AFTER a stock split? Don’t think that just because you are getting a good deal in a seemingly good company that you are going to be a millionaire overnight. The rule is that penny stocks are risky and volatile, the exception is that they can bring massive returns. Until you are proven otherwise, always operate under the assumption that you are the rule, not the exception.
Have an exit strategy
One of the great things about penny stocks is that a few cent per share increase can be a big percentage return. Many experts say if you can hit 20-30% return, sell and take it to the bank. Don’t hold on hoping for the 1,000% return. I advise checking how much your trading fees are going to be, nothing wrong with buying and selling when you hit a certain point, but you do not want to eat up the profits in trading fees.
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