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6 Things You Should Know Before Investing in Penny Stocks

Written by 9rules Blog on June 27, 2016

You may have heard a bit about penny stocks when people talk about making strong investments. Penny stocks are an affordable way to enter the ranks of investors, and they’re quickly gaining popularity because it’s possible to see incredible returns in a short amount of time.

PennyStocks

Timothy Sykes is the best example of this. He took $12,000 of his bar mitzvah money and invested it in penny stocks. Within just a few years, his profits took off, and by the time he was 21, he’d made $1.65 million from his investments.

Now, Sykes is seeking to share his knowledge with the rest of the world and help make penny stocks a more popular option among all investors. But if there’s one thing Sykes and most other experienced investors will tell you, it’s that you should never enter this market unprepared.

Penny stocks can bring high returns very quickly, but those returns can disappear just as fast when the stocks plummet without warning. Before you make any investments in penny stocks, here are some essential things you should know.

1. There’s a lot of homework involved

As with most worthwhile things, you have to work hard for the rewards. You can’t simply jump into the penny stock market headfirst and expect to enjoy instant, wild success.

Most of the time, there are no minimum standards that penny stocks must maintain in order to stay on the Over-the- Counter Bulletin Board (OTCBB) exchange. This means you’ll have no safety cushion to catch you if you fail, so it’s essential that you research and prepare yourself before investing.

First, study the history of penny stocks. Look for patterns and tricks that will help you sense when the market is going to turn down, and observe the current trade status for these stocks. Also, research which stocks are currently most profitable and are most likely to bring high dividends.

2. Success stories don’t necessarily apply to you

Stories like Sykes’s quick millions and other tales of great success make it very tempting try penny stocks and expect unrealistic returns. But Sykes admits his success was based only on what worked for him; it might not be the same for other people.

He encourages investors to become savvy before choosing their penny stocks and not to get lured in by the notion of easy success. “You have to say no,” Sykes told Market Watch.

“You can’t invest in penny stocks as if they were lotto tickets, but unfortunately that’s what most people do, and they lose again and again. Think of penny stocks as inmates in a prison that you can’t trust.”

3. Don’t get greedy; sell quickly

If your penny stocks take off immediately and gain 20 or even 30 percent within the first few days, that’s the best time to sell. You can’t get greedy in this game, because the chances for success with that attitude are low. Don’t aim for a 1,000-percent return. Sell when your profits have made a decent increase, and use that money to invest again elsewhere.

4. Penny stocks need high volume

Trading low-volume stocks makes it very difficult to shift to a more lucrative position. Most investors encourage investing in stocks that trade at least 100,000 shares each day. In addition, it’s usually best to trade stocks that are priced at more than 50 cents per share. Anything less than that is not liquid enough to be worth your time.

5. Aim for the best penny stocks on the market, every time

Always try to buy penny stocks with recent earnings breakouts. “I love buying penny stocks when they have good earnings, or when they are breaking out to 52-week highs on volume that is at least a quarter million shares a day,” Sykes says. “They are easy to find if you look.”

As you look for these high-performing stocks, don’t choose any that have a 52-week high because they may only be there due to pump-and- dump schemes. These stocks don’t have a good history of performing well, and their performance is likely a fluke.

6. Never get too attached

Whenever you invest in a penny stock, you’re likely to be fed a story about how this company will revolutionize the world, and you’ll want to stick with it forever. But remember that these companies are trading at penny stock value for a reason, and it’s nearly impossible to tell which companies will actually jump into more lucrative shoes.

There’s not much room for optimism here. Rather, proceed with a kind of realistic cynicism in which you do your own research, and diversify. When you see a healthy increase on your stock, sell it quickly before it drops. Getting too attached will more rlikely than not leave you broke.

Penny stocks are growing in popularity, but they have a reputation for being high-risk, volatile investments for a reason. Always keep that in mind, and proceed cautiously. People who are the most careful and wary tend to see the best returns.