We’ve all heard about the investor how bragged about his one hundred pc or 1000% return on a stock or about the fellow who made it rich by making an investment in little caps, undiscovered stocks that made it huge. In principle, it seems to be too straightforward. Invest in 2 penny stocks, then sell them when they move up. Sadly, it is too straightforward. Too straightforward to lose money unless you know what to search for. Here are a couple of things to look for when trading penny stocks.

First, lets have a glance at what sorts of firms trade on the OTC BB or Pink Sheets.

Stocks that no longer trade over $1 on the Nasdaq

These include corporations that slid from grace ( Enron ). While it is possible that they may see better days in the future, the percentages are stacked against them. Its typically best to avoid trading these stocks. If you feel the temptation is too much, wait till the stock starts to rebound. If you try catching a falling knife, youwill get hurt.

New Start Ups

Each year there are hundreds or maybe even thousands of firms who decided to come clean. Whether or not they need the money to expand their business, or are looking to cash out their equity, its a natural progression for a company with aforceful story, and a great track record to go public. While many of these firms will file for an IPO, many others will start off trading on the OTC BB as a penny stock

2nd, lets look at some tips to help the penny trader duck making dear mistakes.

Due Diligence

Stocks mentioned on the Pink Sheets do not have to file annual or quarterly statements. This makes starting your due diligence difficult. Regularly the data is flaky at best, and usually its biased. You should be expecting an investor to point out good things about the company. If the company didn’t have potential, they wouldn’t be holding it. Or, they might be expecting to unload their shares and hope to chat you into buying.

Stocks listed on the OTC BB file annual and quarterly statements. This provides some degree of financial success. You’ll find most penny stocks lose money, whether through managerial incompetence, or research and development. The secret’s to identify the firms whose management has a record of doggedly making money, or at the least, delivering on their business plan, and decreasing costs.

Penny Stock Newsletters

Being a writer for The Market Edge 360 ( http://www.1source4stocks.com ) puts me in a biased position when chatting with penny stock newsletters. Hereis what I can tell you : be careful! Check the disclaimer for the amount the newsletter is being paid to carry the profile. Are they being paid in cash or in shares? You will probably find a link between the quantity of shares they are being paid, and the rating on the hype meter. Does that mean that you need to avoid any stock where the company is paying IR executives in shares? No. Just bear in mind that they are selling a tale, and if they sell the tale to other stockholders, they will gain. This is not a problem if you get in early, but may be an issue if you aren’t ready to jump in right away.

have a look at the track record of the newsletter. Have they profiled winners? Do they state the facts, or state the hype? Do they also offer unpaid stock profiles? If they do, you’ll likely find that they do their own research in all firms, and are looking to ensure that they aren’t passing a puny stock your way simply to pay the bills.

If a company is paying an IR pro money to profile a stock to its customers, should you avoid it? Naturally not. Think of the payment as advertising. They are promoting the company, and trying to get exposure. Like any company, the only way to get exposure is through some system of advertising. So don’t dismiss a paid profile as hype. Keep it in the back of your intelligence while you are reading the profile, but focus on the profile. You may find a diamond in the rough that no one has uncovered.

Volume

If you need to make cash, you’ve got to be ready to buy and sell enough shares to lock in your profit, or look after your capital. If ABC company’s daily volume is only 500 shares a day, it may take you a couple of days to accumulate a position worth taking. If there is bad news, who’s going to purchase your shares? If the volume is low, stay away. Its not worthwhile. If you feel that strongly about owning the company, think about contacting the company directly and working out a deal.

Buy Results, Not the Story

If you purchase the hype, percentages are, you’ll end up being the last one to own the shares, while everyone else has sold off their position. Look at a company, take a look at what their business plan was, and confirm if they have followed thru on that plan. Were they successful? Did they bring a product to market on time? Did the company follow through on its purchase system in the style they set out? The hype might get you aquick pop unless you are watching your trading screen each 2nd of the trading day, you will miss out.

Size matters

There are thousands upon thousands of penny stocks. The size of your position shouldn’t be anymore than $2000 – $3000. While this might not seem like much, keep in mind that it’s not peculiar for a $0.10 company to fall to $0.05. That could be a 50% loss. If your position is $10 000, a50% haircut leaves you with only $5000. Keep your losses to a minimum. If the Corporation has done well, and you are up, either take your profits off the table, or add to your position, and be sure to reset your stop loss so as to protect your previous profits. Capital preservation is the secret to successful trading.

Have a plan before you buy. What are your reasons for buying. What’s your exit strategy? Where is your stop loss? When will you’re taking your profit? Write down these answers before you place that buy order.

Penny stock investing can be moneymaking. Remember, you are taking bigger risks than you would if you were buying shares in a bank stock. That risk can be rewarded with returns that you cant get with a bank stock, or, it’s going to be had a meeting with alarge loss and a bad taste in your mouth for making an investment in penny stocks.

Do your homework, do not believe the hype, and look after your capital. How does the stock market work?? While it may appear that its all about taking your money away from you, its actually all about smarter traders making money from the greedy traders. Dont get greedy and you’l;l make money.

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