Blog : 5 Simple Tips to Limit Losses in Penny Stocks
by Peter Leeds on June 18th, 2015
There will always be the potential for downside in stocks, no matter how optimistic you are about an investment. In fact, you are risking every single dollar you invest.
The good news is that it can be simple to limit the potential downside, while still enjoying all the benefits of the upside. By implementing these 5 tips, you will be sleeping a lot better at night.
1. Profits are Made When You Buy
Profits and losses are made the moment you buy, not the moment you sell. Make sure to only purchase shares in the highest-quality investments in the first place, rather than "taking a chance" on some great idea or concept.
Look for businesses which are making money, and are enjoying a growing customer base. Look also to proven management teams, made up of people who kicked butt at their former companies. People tend to do what they always have done.
Always perform exhaustive due diligence, and consider calling the company to ask questions. They have helpful Investor Relations representatives, who will be more than willing to talk frankly about the business' prospects and challenges.
2. Trade like a Robot
You will have better results if you take emotion out of the game. The worst trading decisions are based on greed, fear, impatience, or frustration. The best trading moves are driven by tried and true choices which work independant from emotions.
3. All In, All Out?
Most novice investors think in terms of, "buy all you can," then, "sell the entire bunch." A better way is often to scale in and scale out.
Instead of buying all you can afford right away, you may find better success when you purchase only a third or fifth of the shares you wanted. Then having had a few night's sleep, and watching new events play out over time, you will have a better idea of whether or not to purchase more.
Selling is the same idea - just because you decide to sell your shares, that doesn't mean you must do it all in one bunch. Take days, or weeks... in most cases this will prove helpful.
With thinly-traded penny stocks, this guidance is especially important, considering that a large trade order can really move the share price.
4. Limit Losses with Limit Orders
As penny stocks tend to trade fewer shares, and thus are more susceptible to buying and selling volatility, it is best to use Limit Orders.
Market Orders mean telling you broker to "buy the shares." You get whatever price is available. If you purchase is large, the act of buying will actually drive the price higher.
Limit Orders means telling your broker to "buy the shares at $3.20 or less." In this example, you ensure that you will purchase the shares at $3.20 or less per share. This protects you from volatility, and limits the most you would have to pay.
The only downside to Limit Orders is that you may not get the shares. Using our example again, if the stock was only trading at $3.21 or higher, you trade would not take place (unless the share price came down, or you raised you buy price).
5. Stick to the Better Markets
NASDAQ, Bulletin Board, AMEX, and NYSE all have reporting requirements and regulations. Getting listed on any of these better markets is much more complicated, involved, and expensive, while providing greater investor visibility. High quality companies tend to gravitate to high quality exchanges.
On the other hand, terrible investments and near bankrupt corporations often show up in the only place they can - the Pink Sheets, the OTCQX, and the OTC marketplace. Just like in a casino, your odds of winning on BlackJack are much better than playing slot machines. Why not increase your odds by sticking to the best markets?
By implementing these simple tips, you will typically will have better investment results. In fact, "better results" may turn out to be a significant understatement. Hopefully you will see for yourself...
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As of January 2017 we no longer publish the blog and it has been removed from the webiste menu.
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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