| |
Lowering Your
Risk-Factors in Penny Stock Investing
By: Daniel B. Johnson
May 22, 2008 (http://PennyStocksRising.BlogSpot.com) – We love
Penny Stocks for the excitement of the fast movements and the
potential for the huge 100% or more gain in a day or week. If
you have spent any time analyzing or investing in penny
stocks, it can be downright boring to track a NYSE issue. Of
course, we could all do without the high risk factors
associated with penny stocks.
There are many ways to mitigate the risk with these types of
trades. If you want to minimize the risk with penny stocks,
here are 3 things you should NEVER DO:
1. Place a Buy Order Without Placing a Stop-Loss Order at
the Same Time
Using stop-loss orders is an absolute necessity. It is like
buckling your seatbelt when you get in the car – it doesn’t
take long at all and can potentially save your life. Always
place your stop-loss at the time you buy. It is just a good
habit to get in to. Don’t tell yourself that you will do it
later, because you likely won’t. At the time you place your
buy order, you should ALWAYS, ALWAYS place a Stop-Loss order
along with it. Think of it as the investor’s version of the
buddy system. You need to go into your stock purchase with a
buddy in case something goes wrong.
A Stop-Loss is an order to sell your position in the stock. You determine a
price that is lower than the price you are buying at. So if your investment
starts to turn south and hits your trigger price, the Stop-Loss order will
automatically sell your shares and prevent further damage.
Many penny stock investors do their trading on a part-time basis. So if you have
a day job, you are not able to pay attention to your portfolio at all times. A
stop-loss is your piece of mind that you are protected if something goes wrong.
Where you set your Stop-Loss price is determined by the historical fluctuations
in the price of the stock and the expected term of the trade (short or
intermediate). If you are doing a short-term trade that you expect to last only
minutes, your stop-loss can be only one point off your buy price. For
intermediate-term trades, set it just below the support level. So if the stock
breaks below the support, you automatically cash out before disaster strikes.
2. Actively Trade in Low Volume Penny Stocks
One of the risk factors for Penny Stocks is that they tend to be thinly traded
stocks, on average. It is not uncommon for an issue to have volume of less than
5,000 shares per day. The problem with these low volume stocks is that it can
prevent you from selling the stock when you want to because there are no buyers
– or the only buyers out there are the market makers who will not be sympathetic
to your situation.
You never want to be in a position where you want to sell, but no one wants to
buy. When a thinly traded stock goes south and you are desperate to get out, you
must be confident that there will be a buyer out there for you. A good rule of
thumb is to set your limit at 100,000 shares traded per day. That way you can be
sure someone will take the stock off your hands quickly. You can go lower based
on your experience and tolerance for heartburn, but weigh the advantages.
3. Insist that You Are Right When the Market Says You Are Wrong
The only reason you would buy a penny stock, of course, is because you are
reasonably sure the price is going to go up. But that does not always happen. If
your stock keeps dropping and breaking through support levels, you have one of
two choices. Hold the stock longer and keep telling yourself that you are sure
it is going to come back. Or exit with a small failure and deal with the
emotional consequences and wounded pride.
If you are the type of person who has trouble admitting defeat or are just
overly stubborn, know that these personality traits can cost you if your stock
doesn’t follow your plan. Remember that “Your first loss is your smallest loss”.
The individual investor must always keep in mind that trading is you, the little
guy, against the market markers and the market itself – and smart money goes
with the market every time.
Take heed of these 3 warnings to help you minimize the risks that are inherent
in penny stocks. All are simple safeguards that are easy to follow and can help
keep more money in your pocket.
Daniel B. Johnson is vice-president of a wireless communications
company based in Dallas. You can learn more about
Online Trading
for Beginners and penny stock investing by visiting his blog at
http://pennystocksrising.blogspot.com
Copyright © 2008 AllPennyStocks.com. All
rights reserved. Republication or redistribution of AllPennyStocks.com's content is expressly prohibited without
the prior written consent of AllPennyStocks.com.
AllPennyStocks.com shall not be liable for any errors or
delays in the content, or for any actions taken in reliance
thereon.
|
|
