Thinking About Trading Penny Stocks?
Trading Penny Stocks is not so simple as many traders would think. Penny stocks are low-priced, small-cap stocks with share prices below $5 and with market caps of less than $200 million. Penny stocks are generally considered as a speculative investment, where investors stand to lose all their money at one swipe. Before investing in a small company’ s stock, if may be prudent to read on certain key areas.
Investing in penny stocks are considered risky. The principal reasons for the inherent risk, are low liquidity and the lack of stringent reporting standards. Hence, it would be well advised to only invest on what you can unbearably afford to lose. There must be sufficient back-up capital to cover up for possible losses in case your investment strategy goes wrong. The dangers of penny stocks, lie on its being volatile and of being a niche market that can be easily manipulated by unscrupulous dealers. The companies do not have the stringent reportorial requirements of exchange traded companies: hence, may not have the financial records to show on the results of their operations as required by those traded on the bourses.
Before you dip your hands into actual trading, you must learn the basic trading concepts and terminologies. You can start with mid and large cap stocks initially. You should have the technical grasp of understanding the – Balance Sheet, Income Statement, and Cash Flow Statements and other financial reports. There is need to understand the whole gamut of penny stock trading – what makes it tick and why it is risky. You need to understand a lot of financial terms like – money flows, share structures, financial markets, loss of investments, scams in trading, and stock trading, among many others.
A deeper understanding of financial portfolios and how to create one is also needed. You should be able to know by gut feel, on which stocks to reject off hand. These would include: stocks that are not traded in the bourses or OTCs, companies with income per year of less than $10 million, companies that are highly promoted online either via email or paid advertising, and companies whose operations are vague and hard to understand. You must learn to understand debt to equity ratios, and avoid companies that are highly leveraged or whose operations are run through debts. You must learn to be wary of red flag companies, who are earmarked as entities operating through illegal means – like stock dilutions, for the purpose of raising funds.
A thorough understanding of the stock market would enable you to understand the intricacies of doing the trade. A keen perception of the market would make you look for companies who have strong cash positions that keeps growing over time. A knowledge of financial ratios would also help you look at other indicators like – the difference between price and book value per share instead of merely looking at share prices. Learning the trade would enable you to come up with market strategies like buying companies with low or under six times multiple on their cash flows. Another off the cuff trading strategy, would be to limit penny stock investments to no more than five percent (5%) of your total portfolio.
Stock trading is not something for you to play around with. It is a business that involves real money. It can either earn you money or burn you when you encounter losses. Having this clear perception in mind, would help you understand the whole process better. Asking yourself if a decision would make you earn money or not, will enlighten you on what clear action to take. Investing in management software and speed internet connection do not cost that much nowadays. These are helpful tools that can help you greatly when you do stock trading.
There may be a need for you to buy two kinds of software. The first one would be for managing your personal money matters; and the second one, will be for trading. The former will be used to record all your profits and losses for each trade, the costs of subscriptions , broker’s commission, and other relevant expenses pertinent to your trading activities. The latter will be used to keep track of stock and fund prices, stock trading reports , and technical analysis of trading trends. All of these factors will sink in if you have the right expertise to understand it. There would be a need for you to get a proper education that would teach you the mechanics about basic accounting principles, financial analysis, market trend analysis , a keen understanding of reading annual reports, and understanding the stock market lingo. You may not need to be an accountant to do the trade, but a deep understanding of the scoring system can help you survive the game.
With a good sense of money management, you would know about how to allocate your financial portfolio that no individual trade can wipe it all out in one swipe. Being a wide reader can help you better understand the industry and its far reaching effects on market trends that affect stock trading. This would include readings in all areas like – finance, economics, taxation, business, politics, governments, investments, and political trends, among many others. Knowledge of all these matters would help you become a successful trader by being able to react to situations as they come. With this knowledge, it would be necessary to find a reputable penny stock subscriber who can help you pick stocks, offer trading tips, and help you choose the right portfolio management software. The services may not come cheap, but these professionals are experts in the field and can help you make a profitable trade while you are still learning the ropes.
In stock trading, greed can kill off a horse. In the same manner, that you as a trader should know when you have it good. A profit margin of 50% is already good. Expecting more can lead you to more dangers of seeing your investments being wiped out due to sheer greediness. The moral of the story: Learn when to quit while the going is good! Trading penny stocks is a difficult process and you should have all the facts and research before you attempt it.