Blog : 4 Things Every Penny Stock Investor Must Know
by Peter Leeds on November 23rd, 2014
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4 Things Every Penny Stock Investor MUST know
The vast majority (> 90%) of people lose money trading penny stocks. A few of us (and soon to be you) laugh all the way to the bank. Here's the 4 points you need to know to enjoy the ridiculous profits low-priced shares can provide.
1. Any company MUST see growth for the stock price to increase.
This growth could involve any aspect of a company's operations, such as:
- sales
- market share
- profit margins
- earnings
- investor awareness
- trader focus
If the growth is strong, you will see the shares respond strongly. If the growth is in multiple areas at once (earnings, investor awareness, and sales, for example), the impact on the shares will be multiplied.
Bonus Point: Keep in mind that the shares already reflect perceived growth. When investors expect a company to report doubled revenues, anything less could result in a drop in share price, even of that growth is a strong 67%!
Bonus Point: If growth is stagnant, or declining, the shares will almost certainly wither away.
2. Most people paint all penny stocks with one brush.
That's like calling any bird just a 'bird.' Is there no difference in habits, diet, sounds, or mating rituals between ostriches, vultures, and hummingbirds?
If I said, "which bird sticks it's head in the sand, can't fly, is taller than a man, and lives in Africa," you would know I meant an Ostrich, and not a Falcon. So, what if I told you the real profits in penny stocks were in companies which:
- were financially solid
- had growing market share
- were established in a growing industry
- had high barriers of entry to new competitors
- were led by management teams who had a track record of success
Only some birds eat meat, most do not. Only some penny stocks are in companies which are about to take the world by storm. Almost all others are not.Spoiler Alert: the penny stocks you are looking for are not listed on OTC, or on the dark markets or Pinksheets. They also are not the ones your coworker or unemployed uncle told you about.
3. Any stock represents shares of the underlying business. The important word there is BUSINESS.
Businesses move slowly. Even the ones that win big take months and years to do it. Yes, stocks can bounce around a bit from minute to minute, but the massive gains come from getting a piece of a business early, then not trading at all while the company grows.
You can go crazy trying to pick up a couple percentage points here and there. That is a lifestyle which is much more involved than simply letting great businesses do their thing. Quality will always rise to the top. As the company does well, the shares follow suit.
As an extreme example, if you had sold Microsoft every time you saw a 5% gain, you would have missed out on the entire ride. Maybe you would have bought back in at higher prices and made another 5%. Unfortunately at the end of the day (with ANY stock in a company on an upward path) you would have traded a potential 250% gain for 250 hours of watching/trading/obsessing to bring in your 15% profit. That's no way to enjoy your life.
Bonus Tip: Companies report the results of their operations on a quarterly basis. This means they divide the year into four 3-month periods (January to March would be Q1, for example). Typically,those quarterly results are made public six weeks after the quarter is over.
Thus, if a company starts pulling in crazy revenues as of July 1st and onward, this might not be made public until the Q3 financial results, which come out in November! With great companies, you must have patience... but it will be rewarded.
4. Its ALL about living to fight another day.
With the speculation and volatility in penny stocks, you stand to make some major gains. However, the losses can sometimes be significant too.
Hypothetically, if you could limit your 'losers' to 5%, or even 15%, but let your gains run, your will see some pretty significant winners which will greatly outweigh the declines. After all, when you are holding a penny stock on the way up, those returns can become 25%, 100%, or even 500% pretty easily.
I personally do this by cutting my loses early. I often keep a 'stop-loss' price in mind, and if the shares drop to that level, I sell NO MATTER WHAT. The first 2 or 5 sells at a slight loss do not feel good, but you could take several dozen of these before it really matters. Assuming an investor got 1 or 2 right over that time, they may be looking at an overall gain, while avoiding any calamitous losses.
Spoiler Alert: This is not investment advice. It is simply what I personally do when investing.
Bonus Tip: Here's is what I wrote in Penny Stocks for Dummies about limiting losses.
Bonus Tip: And more Dummies tactics here.
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You are reading this old blog entry because we still like to reference it. :-)
You are reading this old blog entry because we still like to reference it. :-)
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