Trading penny stocks can be highly profitable, but it’s also one of the most significant risks you can take as an investor. It’s exhilarating to read numerous blog posts from investors who struck gold with a well-timed penny stock trade, but there are just as many failure stories that don’t get published. Keep these tips in mind when it comes to trading penny stocks, and you should be better positioned to help you avoid losses.
Avoid the Temptation of Unknowns
Getting a hot tip is one-way traders can make a ton of money, but hot tips and penny stocks do not go hand-in-hand. Do your due diligence and research the stocks before you consider investing in them. A guy you just met in a business relationship who tells you about a hot mining stock that is on its way up is probably practicing some form of pump and dump. Be cautious and be wary. That’s not to say you can’t make money on opportunities like these, but be cautious when approaching these opportunities as penny stocks are more susceptible to pump and dump schemes than other stocks.
Be Careful with OTC Stocks
Over the counter stocks are stocks that are traded through a dealer network versus a centralized exchange. These stocks have much lower volume, and large orders can cause spikes in the price that can put you into unprofitable territory quickly. Consider this, placing a large 500 share order on penny stocks valued at $.90 would see the first few trades execute at that price, but the large volume you’re injecting will cause spikes that could see the price rise to double or even triple your investment. If there is no other volume on the trade that day, the price could drop back down to $.90 or below, and you’re at a significant loss when you start. Be careful with OTC stocks and high-volume trades.
Penny Stocks are by Nature Unpredictable
Day traders and swing traders count on the nature of patterns to help them make a profit during their trades. Penny stocks can be subject to the same patterns, but they are bets more than anything else. The OTC market is considered the Wild West of trading and should be approached as such. Assume that you will take losses with any trade you make and be pleasantly surprised when you make a profit. You should also be wary of any deal that is touted as a sure-fire way to make a profit within a projected time period. No one can predict the future and promises that you will earn a return on your initial investment are just as hollow as someone trying to sell you ocean front property in Arizona. Keep the mind of a skeptic when you approach penny stocks to help save yourself a lot of grief in the long run.
Listen to Seasoned Penny Stocks Veterans
If you don’t understand how the over the counter market works, then you should seek out the advice of an advanced trader before dipping your toe in those shark-infested waters. Greed is never good when it comes to penny stocks and the more prepared you are for how the market operates, the more likely you are to turn a profit with your first few trades.