Penny stock trading appeals to many new investors who are attracted to the lure of possibly making a large fortune with a small initial investment like Tim Sykes did.
Penny stocks are simply any stock that trade at least than five dollars, or sometimes for less than one dollar. They stand in stark contrast to the larger Wall Street stocks that trade on the big exchanges such as the NASDAQ and NYSE.
While it is certainly possible for you to make a fortune with trading penny stocks, it’s also possible that you could potentially lose all of your investment as well. This article will essentially serve as your Penny Stocks 101 Guide as we cover some of the basic rules that you must follow in penny stock trading.
Here are four rules for trading penny stocks for beginners:
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Research, Research, Research
If there’s only one piece of advice that can be given to you on trading penny stocks, it’s to research the company you are considering investing in intensely before you follow through with purchasing a stock.
One of the best ways to research stocks is to find a successful mentor who can teach you the ropes of penny stock trading first hand. Alternatively, you can also thoroughly research a stock online by exploring the financial position of the company and whether other professional investors are investing their money in them.
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Don’t Buy A Stock That Has Negative Earnings
The second rule of penny stock trading is to never invest your money in a company that has negative earnings (meaning they are losing money). This is a massive red flag, and in fact it’s the biggest indication that the company is not going to succeed in the future.
You should only consider investing your money in a company whose assets are greater than their liabilities. You can also quickly tell if a company has negative earnings if they have a negative (or — ) P/E sign.
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Diversify
Never invest all of your money in a single stock. Even if this one company looks to be very promising, you shouldn’t bank your entire investment on it. Diversify your portfolio by investing in at least five to ten separate penny stocks.
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Never Fall In Love With A Company or Stock
Even if you strongly believe in the company of a particular penny stock, avoid forming an emotional connection to it. This could cause you to make disastrous decisions, such as not selling your stocks to cut your losses when the price of the company’s shares is falling dramatically. This is yet another reason why it’s important to diversify your portfolio. Even as one of your investments begins to lose you money, another could cause you to make gains.
Trading Penny Stocks For Beginners
These are just four of the most essential rules that you must discipline yourself to follow when trading penny stocks. By not following these rules, you will only be setting yourself up for making a major blunder.
