By definition, a penny stock is any stock that trades at five dollar or less per share. Some people define it as being one dollar or less a share.
Regardless, the simple fact of the matter is you can buy more shares with less money when you trade penny stocks versus other kinds of stocks. Penny stocks are also significantly more volatile, and while this makes the potential for high returns a high possibility, it also means you’re taking a significant risk.
If you have your mind set on getting into trading penny stocks, running into it blindly is a guaranteed strategy to lose you money. To minimize the risk you take, there are five golden rules that you must remember at all times, and that’s what we’re going to discuss today.
Here are the five golden rules of trading penny stocks for beginners:
Golden Rule #1: Only Invest What You Can Afford To Lose
If there’s only one rule to follow with penny stock trading, this is it. Never invest any money that you are not comfortable losing.
Furthermore, it’s not all that smart to invest the maximum amount that you are comfortable losing either. The reason why is because if you do lose all or most of that money in a series of investments, you may feel compelled to invest more money that you can’t afford to lose on the assumption that you’ve learned from your mistakes.
Golden Rule #2: Watch Out For Pump and Dump Schemes
One of the greatest risks to penny stock investing is becoming caught up in a pump and dump scheme.
A pump and dump scheme is when an investor with a large amount of capital purchases a large amount of shares of a stock (enough to influence the price) and then furthermore promotes the stock to other investors, convincing them it’s a good deal.
When more people purchase the stock and the value of it shoots up, the original investor then sells their shares to make a great profit. The price of the stock then plummets once they sell their shares.
Golden Rule #3: Research The Company of the Stock
Not only should you pay exceptionally close attention to the charts of the stock you are considering investing in, you should also research the company of the stock as well.
Specifically, you want to see if the company has strong fundamentals and a bright future ahead of them. Facts that you will want to find out include how much cash the company has on hand, if they are running a budget surplus or deficit, the history of the company, and the demand for their products or services.
Golden Rule #4: Never Invest Everything In A Single Stock
You never want to become emotionally invested in any stock, or else it will be your downfall. You never want to invest all of your funds in a single stock either, because it’s simply too risky.
Instead, diversify your holdings. Most professional investors will have a portfolio of around twenty stocks or more. If you’re a smaller beginner investor with less capital, a portfolio of around two to three will be good.
Golden Rule #5 – Set A Stop Loss To Limit Losses
When investing in any stock, you can always set a stop loss to limit your losses should the price go downhill.
A stop loss is simply a pre-determined price in the stock, below the price you invested in, where your funds will be automatically withdrawn from the stock should that price be hit. For example, if you buy a stock at $0.75 each, you can set a stop loss at $0.7 to limit your losses.
The Golden Rules of Penny Stock Investing
Investing in penny stocks is naturally a risky endeavor regardless of whether you make a short term trade or a long term investment. This is why it is definitely worth your time to do your research and to keep these golden rules written down and kept in a place where you will see them at all times so you can easily remember them.
While you may be motivated to put your money into penny stocks based on the high earnings that many traders report, the truth is those traders possess much experience and skill at trading. You must develop the same experience and skillset if you want penny stock trading to be an equally lucrative investment for you.