Mitigating Some Risk in Trading Penny Stocks

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Mitigating Some Risk in Trading Penny Stocks

Mississauga, ON / April 2, 2014 / To many entrenched in Over the Counter stock trading, a day in Vegas is a cakewalk compared to the nerve wrenching that can be involved in trading penny stocks. Investing in penny stocks rightfully carries sharp words of warning, including the Securities and Exchange Commission cautioning that investors “should be prepared for the possibility that they may lose their whole investment.” On the other side of the tracks, a thorough understanding of the space can help mitigate some risk.

First, let’s be clear as to what a penny stock is. To most blue chip traders, any stock below $5 per share is a penny stock, regardless of what exchange it is listed. Set foot on the floor of the NYSE and don’t even think of mentioning the “dirty” letters “OTC,” because they’re all penny stocks to those guys. Apropos, NYSE-ers don’t like the word “Nasdaq” either. In fairness, it’s difficult to lump in a lot of good companies that have shares trading at $4.50 each in the same category as a non-SEC-compliant pink sheet company trading at sub-penny levels, so it’s pertinent to keep it all in context.

Most self-directed traders, especially those who look at OTC stocks, use a less stringent and more appropriate definition, typically calling a penny stock one that trades beneath one dollar per share. Also consider that the label “pinksheet” can be tossed around, often times inaccurately as slang for a penny stock. There is a more concise definition and OTC Markets has done a tremendous job in the past five years with defining and marketing “pink” as a category on its tier system that needs to be understood. Although it is not a hard fast rule, most pros only “trade” pinks based upon patterns or market activity and almost never “invest” in them.

So if penny stocks are so volatile and risky, why trade them? The answer is in the question; it’s because they’re so volatile. There are only a handful of stocks in excess of $5 that will make moves of 10 or 20 percent or more in one day. Even using the highest end definition of penny stock, it’s not uncommon to see moves in excess of 10 percent in a trading session. The less expensive the stock, the bigger the moves can be and that lures in traders to get a piece of the action.

There have been some big names in the industry that have created million-dollar portfolios by trading penny stocks via different trading philosophies that they personally refined through the school of hard knocks. Many of these traders have spoken publicly about how they did it, so do some searches and get educated from some free research. Take some time and perform your due diligence on any one of them, just like you would before investing in a company. Be leery of any one that promises a “get rich quick” scheme, because that is almost never a winning proposition for an individual investor. The old adage, you get what you pay for couldn’t be more true with penny stock newsletters. While free to join, many free penny stock newsletters simply look to hype their biased picks, and their members end up on the losing side of the trade more often than not as a result.

Penny stock newsletters should not only post their realistic expectancies before they enter a trade, but also report their results in an unbiased manner, both winners and losers. If they don’t do that, be cautious as to why. Also note their proclaimed winnings based upon entry and exit prices. For example, a supposed stock guru can report that he sacked gains of $500 on a trade in a matter of minutes, which is certainly nothing to sneeze at. However, if their profits were based upon an entry point of $3.00 and an exit point of $3.03, that means the percentage gain was only 1.0%, meaning that they had to invest $50,000 in the trade. Most home traders aren’t sinking that kind of cash into a single play. Point being, see how a service is stacking up their gains and see if their trading strategy fits your model. Also see if they are sending real-time alerts (i.e. email, chat, text) so you can move when they do. Most credible services will provide a free trial period for potential members to get a clear picture of how it works.

For example, Pro [] is one that provides a one-month free trial. Going through the Pro service in more detail, and it becomes quickly evident that the stock picks chosen show a succinct explanation about a particular Company’s technical analysis components mixed with splash of fundamentals, accompanied with a buy and predetermined sell point and the logic behind the calls. Each pick is under $5 and typical meant to have a hold period of weeks to few months, based upon the credentials of the chart. That’s the type of transparency and learning environment that can benefit both novice and experienced traders.

When it comes to penny stock trading, there are many sources, such as social media and popular chat rooms to visit that are full of swing and momentum traders that are spouting out enough plays to make one’s head spin. Be advised to enter most of these environments knowing that many of these plays are promoted stocks, meaning that they can crash as quickly as they move upward.

There are countless rules and pieces of advice being propagated by so-called pundits across the web about trading penny stocks. Anonymity and disclaimers are great shields for protection, so watch your step. For self-motivated traders that choose not to follow the golden rule of letting a professional financial advisor handle their investments, there are a few other rules that should be followed on every single occasion. For starters, know the risk and heed the SEC’s warning. Second, know the newsletter that you are following, including their motivation. Most don’t give two hoots about your portfolio. Third, do your due diligence before becoming a sheep in a lion’s den. Finally, the old adage of “mind your pennies and the dollars will take care of themselves” could not be more appropriate. There indeed is money to be made in penny stocks, just be sure to bank your profits and never get greedy.

Contact Info:

Peter Szafranski Pro
Email: [email protected]
Phone: 1 (800) 558-4560 Ext: 101


Source: Pro