How To Make Money Trading Penny Stocks

| August 8, 2008 | 0 Comments

Penny stocks.  Depending on your past experience the comment alone either makes you smile. . . .or run the other way in fear.  I’ve made some good money from penny stocks.  I’ve also lost some good money investing in penny stocks.

And I can honestly say this.

I know people who’ve made millions from one penny stock investment. It’s absolutely amazing.  But, like all things having to do with trading and the stock market, it has its risks.  If you understand and work to minimize those risks you might too be able to brag about making serious money off of penny stocks.

With penny stocks there are numerous risks.  As a matter of fact, the SEC has published a notice called “Important Information on Penny Stocks.”  They require your broker to get you to sign a statement that says that you’ve received it.

I’m not going to bore you with all of those details.

Instead, here are five tips about trading penny stocks that should help you become a better trader.

Tip One:  Make sure investing in penny stocks is right for you.

Everyone’s financial situation is different.  You need to consider your investment in penny stocks very carefully.  Some investments are riskier than others.  Penny stocks are at the high end of the risk spectrum. That being said, making the right investments can generate high rewards.

Many penny stock investors dedicate a small portion of their portfolio to these types of investments.  Like they say, “all things in moderation.”  So don’t go throwing your life savings into a penny stock. “OK?”

Tip Two:  Understand the volatility of penny stocks.

Volatility for stocks is simple.  It’s a measure of how much they go up and down.  Stocks never go up in a straight line.  Every day is a new day, and the opportunity for a gain is as good as a loss.  Remember, volatility is a good thing . . . when it moves the right direction.

Having a steel stomach is important for investors focusing on penny stocks.  You might see your investment rally 100% one day then loose 50% the next.  Volatility is huge in these markets . . . so understand it and embrace it.  If you like a little risk and excitement in your life, penny stocks might be perfect for you.

Tip Three:  Do your research BEFORE buying a penny stock.

I can’t tell you the number of times I’ve heard investors bemoan their penny stock investment.  Usually it’s from investors not doing their research.  I can tell you how many times I’ve heard . . . “I’d never have bought the stock if I knew that!”  Do your research.  Read everything you can about the company, their product, and the management team.

And “NO.”  Just because your brother-in-law’s buying the stock does not mean your research is done.  Jump through the hoops.  Do the research. Ask questions.  You’ll be glad you did.

Tip Four:  Be willing to hold on for a while.

It’s not every day you’ll find a stock to invest in.  As a matter of fact, you’ll no doubt discard a hundred or more for every good investment you find.  Once you find a good one hold tight.  This is one of the most important tips in the group . . . be willing to sit and wait.

Rome wasn’t built in a day, and your stock probably won’t start showing profits the first day either.  I know investors who have waited two, three, and even four years for a penny stock to show a really big profit. Have conviction in your research, and be willing to wait.  When the stock starts to move you’ll no doubt be handsomely rewarded.

Tip Five:  Have a plan for your investment.

The greatest investors of our time always have a plan.  They decide in advance why they are buying a stock.  They’ve even identified a profit objective.  They’ve determined what to do when the trade moves in their favor.  And more importantly they’ve already decided what to do if the trade moves against them.  Having a predetermined sell strategy is very important.

Follow all of these tips before you enter a penny stock trade.  Believe me, it makes investing much easier.  I’m sure it will help you become a better penny stock trader.

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Category: Penny Stocks

About the Author ()

The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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