Penny stocks are low priced stocks listed by small companies. It is very easy to invest into these stocks as they don’t cost much and promise a big profits but trading these stocks is also a good way to lose money.
Although these stocks are low priced but low liquidity ensures high volatility. So, it is advisable for small investor to invest with cautious and get clear understanding of the company’s business and its financials.
There are few rules listed below, can be followed while investing into penny stocks:
- Ignore penny stocks success stories: Investor must try to ignore the penny stocks success stories which are touted on emails, SMS etc. The investor must invest into penny stocks with caution and not play as a gamble and loose instead must focus on profitable penny stocks with solid earnings growth and those making 52 week high.
- Disregard the tips: The tips send via email, SMS, newsletter, fake press releases are just manipulations to sell those penny stocks rather than buy. Many big investors dump their stocks are high price by creating manipulations and trapping the small investors into it.
- Sell it Quickly: it is advisable for small investor to sell quickly if he is getting 20%-30% returns in just matter of few days rather than getting into greed to get more returns, because they are volatile and fall back more sharply.
- Never Short Sell: Investor must not short sell these penny stocks. Any positive news although fake can make stock shoot up 50% or even 100% in just a matter of few days and leaving shorting to pros.
- Focus high Trading volumes: These penny stocks are illiquid in nature. Focus on stocks which have high trading volumes on consistent basis rather than average basis. Consistent high volumes will ensure investor able to sell his holding any moment.