Trading Top Penny Stocks – The Rules Of The Road
Choosing top penny stocks is as much an art as it is a science. If you want to make a killing in the penny stock market, you need to understand how to do it. When you choose top penny stocks, you are not looking for the best penny stocks. The best penny stocks are left to the investors. To me, the top penny stocks are what you are looking for when you are trading, not investing.
This article is about trading top penny stocks. See my article called “Top Penny Stocks – The Best Penny Stocks Are Not Always Best For You!” to find out about investing in penny stocks. Just remember, I’m a trader not an investor. And, although I talk about penny stock investing in that article, It’s also about trading penny stocks.
… Pigs Get Slaughtered
There is a saying in the stock industry: Bulls make bucks and bears make the wealth … pigs get slaughtered. In other words, you can make a lot of money in the stock market if you can control your greed.
Never enter a trade without a very well-planned entry and exit strategy. You can have a variety of entry and exit techniques for the different penny stock classes. Just don’t forget to stick to your strategy rather than letting your greed, your stock tips and your alleged insider knowledge make the decisions for you. Always let your head rule you decisions… never your emotions.
For example, if you determine that you will sell a penny stocks the moment it reaches a fifty percent profit, sell it as soon as it reaches that your price target. Or if you set a target of $100 in profit for the day, sell just as soon as your target price is achieved. This also goes for losses. If you set a stop loss point, pack your bags and sell when you lose that much. Otherwise you may lose so much that you can never recover.
Here’s How to Pick Top Penny Stocks That Can Explode in Value
First, you must understand what kind of stock you are looking for. A penny stock that you are very familiar with or which is in an industry that you know a lot about is best.
Second, analyze the stock’s marketplace. Is the market expanding? Is the competition too tough for the new comer? If it is, unless there is some other circumstance that will offset the competition factor, you might want to take a pass on the stock.
Penny Stocks – Are They Really good For You?
Third, there are many individuals who do not have a lot of money but who could completely change their lives if they could win a few solid penny stock trades.
For people in this situation, micro cap or small cap stocks, pink sheet stocks and nano stocks can be their only hope to ever get out of the financial situation they are in. One of the major benefit of these stocks is that it does not call for a large investment to get started.
These lower priced stocks may very well appear to be interesting and tempting to just about eveyone. However, they are not without problems.
Most penny stocks are considered to be extremely risky investments. Equity and marketplace risks, dilution, reduced tradability, very low visibility and volatility are some of the serious drawbacks. It is highly risky for an investor to buy these kinds of stocks rather than the other regular stocks. Also, they are not traded on the main stock exchanges like the New York Stock Trade (NYSE), the American Stock Trade (AMEX) or the Nasdaq. These stocks are typically traded over-the-counter (OTC) or on the pink sheets.
The way you offset the risks is to do really good research or pay to have it done for you by hiring an investment adviser or an alert service.
Penny Stocks – Dangerous Investments!
Countless traders are lured into the Sizzling Stock appeal of top penny stocks precisely because they can get a lot of shares for a relatively small investment. When penny stocks move, they move up fast and usually fall even faster in price. So, you need to be on top of every trade, all of the time.
Investments in securities and equities carry substantial risk of loss of principle, often complete loss. However, many penny stock traders consider those risks are more than offset by the fantastic gains that they can achieve.
Why They Move So Fast…
Penny stocks tend to move so fast because of the way stocks are valued. A significant portion of their current price is a what is known as “intrinsic” value. Intrinsic value is what the company is actually worth today before any changes to its situation.
The rest of the price is based upon future value plus speculative value.
It’s the future value combined with the speculative value that makes them move so fast.
The future value is the value that a new contract or other major positive news will do to the company’s future net worth or prospects. Speculative value is price movement created due to buyer (i.e. trader/speculator) interest or demand.
So if a stock issue has a stock price based upon a one cent per share net worth of the company, winning a large contract that will double the net worth of the company will probably double the per share price of its stock, maybe more.
Then, when the traders get wind of the situation change, the stock can literally skyrocket to even higher prices based upon their speculative fever.
To all you “Pump and Dump” advocates out there…
… Most of the time it’s not “Pump and Dump!” Do your research! Its normal capitalistic market place action.
To Summarize
To find a penny stock that is about to move, you can try the following:
- Understand what type of stock you are looking for.
- Evaluate the market place… the company that the stock represents must have a good competitive and sales environment.
- Make sure the company is financially stable. Can’t get enough information? Take a pass.
- Make sure YOU can stand a partial or total loss of your investment.
- Make sure there is some significant news or change in the company’s situation that will influence the net worth of the company.
- Determine if the move has already occurred. If it has, again, take a pass.
I know that penny stocks can be risky because of a variety of factors but given the potential return, I think that trading penny stocks is well worth the risk, as long as you do the research. [Click here] if you want to find out more about penny stock research.
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