Three Reasons To Trade Penny Stocks
Three Reasons To Trade Penny Stocks
Speculators are attracted to these smaller companies because of 3 things. If you do your homework and research your companies properly or buy a membership in a reputable, high-quality alert service like Penny Stock Prophet so the research is done for you, I believe that you can “Swim with the Sharks” and make money trading penny stocks like the Pros!
First, these small companies will move rapidly when they get a bit of good news. Especially if that news is about a change or anticipated change in the financials of the company…
… Typically, a large contract, the invention of a new, high demand product, an exceptionally good financial reporting period, the hiring of a popular, highly successful executive as a member of the management team, acquisition of a major income producing property/product or the like…
… All of these things and many others will affect the price of the stock in question. And, depending upon the speculating public’s perception of the future value of the company, their profitability and so forth, the price of the company’s shares will change.
Second, when driven by good news, penny stock prices sometimes move up enormous percentages. This is because stock prices are a factor of future value. So, if a company is going to double the profit they will make in the next year because of the news, it will have a very positive effect on the price of the stock.
Right out of the gate in my overly simplistic example, it will probably at the very least double the price of the stock. And, possibly, with the right conditions, the stock price can triple, quadruple or increase even more.
And, third, these dramatic, rapid price changes frequently depend on a thing that I call the “Hype-Factor.”
The “Hype-Factor” is, in its simplest form, the combined opinion of the speculating public about a company’s future value.
Often, this option will cause a “whisper” or “rumor” price target or positive opinion of sorts to develop. Basically, it’s a grapevine and it determines how many speculators will invest in the stock because of the news. Then number of speculators that will buy a stock determine the demand for the stock and hence the company’s stock price.
There are two other things that you need to know about the Hype-Factor.
First, the Hype-Factor Effect doesn’t just come from the grapevine. Often, it has help.
There are a number of websites or brick-and-mortar companies that locate and identify penny stocks that are about to become “hot penny stocks.” These websites or Alert Services can dramatically increase the demand for and hence the price of a stock.
When a major alert service recommends a company’s stock, the price of the stock will “Pop.” Just how high it will move depends on how many of the services subscribers decided to buy on the recommendation.
Second, if the grapevine becomes active prematurely (in other words, the service’s pick became public before an alert service recommends a company’s stock) the stock price may actually fall once the service announces it’s penny stock pick because of the “Buy on rumor… Sell on news.” maxim.
Need I say more?
Watch out for this one. I like to wait a few minutes after the open to see which way a penny stock is going to move before I buy… But, be aware that if you wait too long you may miss most of the price move… They really do move quite fast… Often 20 or 30 percent per minute if the hype-factor is large enough.
Things To Watch Out For When Trading Penny Stocks
There are 5 major things that you need to watch out for when you trade penny stocks.
First, watch out for weak or insolvent companies. Stay away from those companies like they are the plague. Even if you are going to just “get in” and “get out” NEVER take a position in a company that doesn’t have solid financials.
Often, penny stock companies are technically more fiscally sound than many of their “Big Brothers” on the major stock exchanges.
Specialize in those “solid” companies. Always look for fiscally sound, undervalued opportunities that have just had or are about to have good news like I talked about above.
Second, make sure the news you are anticipating really happens. If it doesn’t come about as you expect get out of your position immediately or, better yet, don’t take a position if you aren’t already in one.
Third, NEVER chase the stock. If you don’t get in right away and the price is already in orbit do not buy a position. Trust me, there will be another opportunity in a few days.
Fourth, set a price target and expected time frame. If either of these happen sell. Also, be sure to set stop losses when you buy your position.
Fifth, and finally, if the price goes below the open price get out immediately. Don’t wait! This is one of the hardest things that you will ever need to learn when you trade penny stocks. And, depending upon your brokerage house, close your open stop loss order as soon as you sell.
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