Jump to content
  • 0
Sign in to follow this  
Benjamin Schmitz

What rules apply when trading penny stocks?

Question

1 answer to this question

Recommended Posts

  • 0
There’s a simple reason why penny stocks attract so many investors; they are inexpensive and give traders hopes for huge profits. Many of those drawn to penny stocks end up losing money, so there are rules to follow when venturing into them. Here are 10 such rules.
  1. Ignore the success stories about penny stocks – Many of the stories you read are nothing more than hype meant to drive the price of the stock higher. Always ignore the stories.
  2. Read any disclaimers and ignore tips– All the free penny stock newsletters will have disclaimers in small print at the bottom of each email you receive. Read them and you’ll often find that the newsletter is being paid to promote that “great” penny stock. It’s best to do your own research and ignore newsletter tips.
  3. Sell quickly– A benefit of penny stocks is the possibility of quick profits. Unfortunately, some traders get too greedy. If you get a 40% return in a week, take it. Don’t watch it disappear because you want 400%.
  4. Pay no attention to company management– Many penny stocks are scams meant to enrich those running the company. Don’t listen to management because often they’ll say anything to help lift the stock price.
  5. No short selling– While it might seem attractive, shorting penny stocks is just too dangerous. With limited liquidity you could get caught in a short squeeze and lose 50% overnight. Leave short selling to the pros.
  6. Only trade penny stocks with high volume– Focus on the penny stocks that trade at least 100,000 shares per day. Less than that and you’re flirting with a lack of liquidity that could leave you holding stocks you’re unable to sell.
  7. Mental stops are better than hard stops– While it’s normally best to use hard stops you can set and forget, in the world of penny stocks, where bid/ask spreads can be as much as 10%, it’s better to use mental stops. Just be sure to stick to them.
  8. Buy only the best– Look for stocks making 52-week highs or those with big upside earnings surprises.
  9. Keep positions modest– Never trade over 10% of a stock’s daily volume or you risk getting stuck in the stock and potentially losing a lot.
  10. Never fall in love with a stock– Every penny stock company wants you to think they have a revolutionary idea that just hasn’t been recognized yet. Be careful and do your research!

Share this post


Link to post
Share on other sites

Join the conversation

To reply to this question, sign in or create a new account.

Sign in to follow this  

×
×
  • Create New...