Investment for beginners
Minimizing the risk in investment
Investing in penny stocks offers a very good opportunity to the traders to increase their profits while at the same time it increases the chances of losing the entire investment quickly. The following tips will help you to minimize the risk associated with this risky investment.
Though most of the people dream of making their investment in the next Home Depot or in the next Microsoft, the fact is that the chances of finding such an opportunity are very less. These companies are starting out and bought a shell company because it was a cheaper than an IPO or they don’t have an appealing business plan to prove the investment bankers’ money for an IPO. This doesn’t imply that they are not a good company but you must be ensured about the type of company where you are putting your money.
The average volume of trade can be misleading. Instead search for a consistent and coherent high volume of shares that are traded. For example, if XYZ trades one million shares today but doesn’t trade for the remainder of the week then their daily average will look like 200 000 shares. You should seek consistent volume in order to get in and out at an acceptable rate of return. Also consider the number of trades each day. Is it one insider buying or selling? The first and the foremost thing which you must look for is liquidity. You will end up putting your money in a dead investment, if there is no volume. In such a case, the investor has no option but to sell the shares at the bid which will increase the selling pressure leading to lower price further.
Though it is quite common to see that a start-up company is making losses in the beginning but it is important to find out why they are incurring losses. Is the company properly manageable? Does the company need a joint partnership which favors the other company or does the company require further finances to run effectively?
If the company is capable of making profits, it will utilize the money to grow the business which in turn increases the value of the shares. Lot of research work is required to be done in order to locate these companies but the time spent on research is very useful and help to minimize the risk of losing your money, and you have a better chance to make profit.
Penny stocks are highly flexible. They move up and down quickly in a very short time period. If you purchase a stock at 0.20 dollars and sell it at 0.24 dollars, you make a profit of 20 percent in the process. Similarly, if the shares move down by four cents, you will lose 20 percent of your investment. Most of the stocks are traded in this range every day. If you invest 5,000 dollars, you can lose 1,000 dollars if you happen to lose 20 percent on penny stocks. If this type of loss takes place five times, you will end up losing your entire investment stocks. Hence it is better to keep stops close and move on to the next opportunity. The market is always letting you know something and it is beneficial to listen to the market moves.
If you plan to sell a stock at 0.12 dollars but if it jumps at 0.13 dollars you can either place your stop at 0.12 dollars or take the 30 percent gain. Instead of capping the upside potential, it is better to lock your profits.
Many people come to know about the penny stocks with the help of a mailing list. Though various good penny stock newsletters exist but there exist equal number of newsletters which are only dumping and pumping. They load up on shares with the help of insiders and tend to pump up the company to subscribers of unsuspecting newsletter. The insiders are selling while the subscribers are encouraged to buy the stocks. You can easily understand who is winning in such a trade.
How to sort out the good companies from the bad ones? All you have to do is to subscribe and keep an eye on the investments. Find out whether there was a genuine way of making money? Does the company have proven track record of offering great opportunities to their subscribers? You can easily discover whether you have subscribed to a genuine newsletter or not by subscribing to the newsletter and keeping an eye on the market moves and the tips offered in the newsletter.
One of the most important tips to remember is not to invest more than 20 percent of your portfolio in penny stocks. You wish to invest your money to earn money and want to protect your capital for another investment opportunity as well. Investing in penny stock more than enough money increases the chances of losing the money. If you invest only 20 percent of your portfolio and if that 20 percent grows well, you will have more money to earn decent money. Since penny stocks are highly volatile and risky, investing all your money in penny stock is not a good idea.