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Many people who have never
played the stock market game before start with penny stocks. Heck,
even if you’ve been around investing for decades, penny stocks are
still your ticket to triple-, quadruple- or even quintuple-digit
gains. You just can’t see those if you bet on the Dow.
The problem is penny stocks are a bit more difficult to research than
their large blue chip cousins. To make this a bit simpler for
first-time investors, here are the top ten things to keep in mind when
looking for solid penny stock plays:
Think Outside the Box
When it comes to penny stocks, some of the wackiest ideas have
translated into serious gains for investors who were willing to think
outside the box…
Back in the day, who would’ve thought that computers were the “wave of
the future”? Early investors in companies like Microsoft and Yahoo,
that’s who! They made a bundle by thinking outside the box and betting
on business models and technologies that were out of the ordinary.
There are new technologies and business models out there in the penny
stock world today. Are you willing to think outside the box on your
next penny investment?
Know What You Own
In the world of Wall Street, whether you’re investing in penny stocks
or blue chips, one of the biggest rules is to “know what you own.”
What does that mean?
You should know the company you’re investing in inside and out. Know
its business. Know how it makes money. Know its management.
But as important as this rule is for any investor, it’s doubly
important for investors in penny stocks! That’s because with penny
stocks, share prices can change quickly if you don’t keep a handle on
them.
So know what you own and your investments won’t end up owning you.
Don’t Get in Over Your Head
When you see a hot penny stock that’s ready to take off, it can be
hard to keep from cashing out your 401(k) to buy as many shares as you
can…getting in over your head with penny stocks is an almost sure way
to get burned.
Even though penny stocks can make you some serious money, they’re
volatile — and that means you shouldn’t put more than 10% of your
portfolio on the line.
What’s the smart penny investor to do? Set up an account for just
penny stocks and load it only with money you’re prepared to lose.
Don’t Be Afraid to Ask…
One of the beauties of penny stocks is the fact that they’re smaller
companies that are out there for smaller investors.
As an individual investor, a big multinational might not give you the
time of day. That’s usually not the case with penny stocks. In fact,
it’s not unheard-of for individual investors to pick up the phone and
chat with a company’s CEO or CFO on the spot.
If you’ve got a burning question about a penny stock prospect,
e-mailing or calling the company’s investment relations firm or
corporate offices might be one of the most telling ways to figure out
if that stock’s for you.
Be a Skeptic
Remember when we said to think outside the box? Well, do that, but
don’t forget to be a skeptic…
Just because a company has an interesting new idea doesn’t necessarily
mean it’s a good prospect for your portfolio. The key is… Do you think
that it can monetize its idea?
If that answer isn’t immediately clear, it’s time to dig a little
deeper into that company’s prospects. Thinking outside the box is a
great way to get innovative companies on your radar, but being a
skeptic is the only way to make sure that translates into gains for
your portfolio.
Think, Then Buy
When you’re ready to buy shares of a penny stock, make sure you take a
second to think about what you’re doing. All too many first-time penny
investors take the jump on just a few shares of a penny stock without
realizing how much the size of their investment will affect their
returns.
Think about it this way… You’re an investor who sees an attractive
stock for $1 per share. You don’t have a large portfolio yet, and you
don’t want to take too much of a risk, so you buy just 50 shares for
$50.
Turns out you picked a winner that made 40% in just a week — $20 of
pure profit. You sell and rejoice in your penny stock success. But
wait…is that celebration justified?
You’re forgetting about those $10 execution fees you paid to buy and sell
that stock. That’s $20 altogether. Looks like you only broke even,
despite the fact that you had a stellar stock.
When you’re buying penny stocks, make sure you’re buying a large
enough quantity that account costs (like execution fees) don’t eat up
your profits. You can find out your minimum returns to break even with
this:
Execution Fees/Stock Acquisition Price x 100 = Break-even Gain
(Percent) Needed
Don’t Get Greedy
Lots of penny stock investors see 200%, 500%, even 1,000% gains on a
stock but still end up losing money in the end. It’s not because they
didn’t plan their buys properly…it’s because they got greedy!
It doesn’t matter how much money a stock makes if you’re not ready to
press the button and realize those gains. That’s why you need to set
solid exit points for any penny stock you buy.
It’s human nature to want to hold onto an investment as you see it
climb with no end in sight, but doing that is a great way to miss out
if that trend turns around. When you analyze an investment, think
about a logical exit price and sell for that. Picking solid exit
points will become easier as you develop your investing chops.
Don’t Get Too Nervous
The flip side of getting greedy is getting nervous with stocks that
are seeing major gains in short periods of time. Relax. As a penny
stock investor, you’ve got to be ice-cold when you see one of your
picks take off.
Again, it comes down to picking good exit points for your investments.
If you’re sure that your stock is bound to start losing ground before
you hit that target price, maybe it’s time to re-evaluate what that
price should be.
Remember, you can reanalyze your targets anytime, but you should never
make trades on emotion alone.
Be Realistic
While investors might hope for tripe-digit gains on every pick they
make, even the most seasoned pros of the investing world make bad
picks from time to time. That’s why having realistic expectations is
so critical.
As with picking the right target prices, knowing what kind of gains to
expect comes with experience as a penny investor. It’s tricky to know
when you should expect 20% from a stock and when you should expect
200%.
But setting those realistic expectations now, from the get-go, will
get you into a habit that will help you structure your portfolio in a
way that will get you the most bang for your investment buck.
Be Ready for the Next One
It’s easy to sit back and relax after you’ve just made a trade —
especially if you banked a nice gain. But not so fast!
As much as you might want to bask in your investing success, fight
that urge.
The secret to the penny stock game is to always be on the move. Always
be on the lookout for that next penny powerhouse — the next one might
just be your best yet.
Currently, the market sentiments look quite bearish. Rallies in the
markets are quite short lasting and most of them end in intraday or at
the most in a couple of days. There are selling pressures at every
level in the market. Many stocks have come down 40 to 60 percent from
their peak levels. Stocks and sectors that led the market rally last
year are the worst-hit in this correction.
For example, stocks in banking, financial services, power, energy and
infrastructure have seen much deeper cuts than key indices. Many
investors are stuck with these stocks bought at higher levels.
Investors are not sure whether they should sell at these levels or buy
more to average out their purchase prices.
Here are some points that will help you decide between investing
further and exiting after cutting losses:
Stay invested
Long-term investors who are holding blue chip or fundamentally-good
large and mid-cap stocks, bought at higher levels, can remain
invested. They can also invest more to average out the buying prices.
Valuations of many blue chip stocks look quite attractive at this
point. Many blue chip stocks are trading in single digit PE multiples
and some of them are trading near their book value.
The chances of significant decline from current levels are quite
remote as most of the negative news has already been factored in
current valuations. Usually, these stocks out-perform the index and
recover their losses when the market direction reverses. Investors
holding unknown stocks should look at exiting cautiously and cut down
their losses.
Average out
Investors with high risk appetite can look at accumulating more stocks
at lower price levels and hence average out their entry price in
stocks. However, investors should only invest their risk capital in
the markets. Investors should never take loans to buy shares in the
markets. You should try to accumulate more stocks and average out your
buying price systematically by buying in small quantities.
Usually, in every market rally or correction there are some sectors
that out-perform or under-perform the market. The same trend was seen
in the recent correction as well. The stocks that performed quite well
last year are under-performing the markets. Many stocks have come down
more than 50 percent off their highs |
