Tweaking my stock trading strategy with Penny Stocks - Education Discussions on Stock Tips Forum

drjackmd

Greetings! I can honestly call myself an avid investor. My investment portfolio is pretty well-rounded - some growth and income stocks, some long-term growth stocks, some commodity futures, a few pieces of real estate, and even an antique car. However, I'm still a little skeptical about these penny stocks that keep popping up. But their growth seems exceptional on the extremely short term. My current portfolio is safe but the growth, averaging just over 16% per year, while good is much lower than I would like. To supplement my portfolio gains I've been strongly considering the inclusion of some penny stocks. I was thinking that if I allocated even 8% of my current portfolio and was able to simply double or triple the allocation over a years worth of trading penny stocks I'd be able to increase my portfolio gains by 50-100%. The fact that with such a small amount of money I can substantially increase the yield of my portfolio is what makes penny stocks so interesting. I simply must put penny stocks to work for me. Any advice would be much appreciated.

PaulKincaid

Part 1:

Hello Dr. Jack. My name is Paul and I work for StockTips.com.

You should be aware that some investments in penny stocks are based on fundamental analysis with the goal of making market-beating returns over the long term. Other penny stock investments are made in hopes that volatility in the share price will produce great returns in a short period of time.

You are obviously in the latter category, so let’s go right there. The most reliable way to make money on these penny stocks is to find companies at the beginning of an investor awareness campaign before everyone else. And then, when the masses catch wind of the stock’s potential, the sudden investor interest in the company’s stock often results in a sharp increase in the share price. This may occur at virtually any time. But these price spikes normally crash (not necessarily below the pre-campaign price) at some point, even if the price climbs a lot higher first. Companies in an extended investor awareness campaign may go through a number of peaks and valleys giving you a lot of opportunities to cash in.

You must accept that often these campaigns have no impact on the stock price, or the price might actually go down rather quickly. And even if the stock price does increase significantly, if you stay in too long out of greed, inattention or simply bad luck there’s an excellent chance you’ll end up with losses. Playing these stocks is a speculative, high-risk endeavor. You must be prepared to take some losses with the goal of gains exceeding losses.

This may sound frightening to some, but that’s why it’s considered high risk – An investment not appropriate for all investment risk appetites. And you need to know what you’re getting yourself into.

PaulKincaid

Part 2:

There are, however, some things you can do to improve your chances for success:

1) Treat this sub-section of your portfolio just as you seem to be doing with your overall portfolio – DIVERSIFY. Allocate only a portion of your penny stock money to any one stock.
2) An often overlooked, but very critical part of trading these stocks successfully is smart buying. Many investors get caught up in the excitement of a fast-rising stock price, or fail to limit their bid price, and end up paying too much to make the risk worthwhile, or buy too near the peak to exit successfully. LIMIT THE PRICE you are willing to pay. You will probably end up missing out on a few profitable trades, but over a series of trades you will probably be much better off overall.
3) Don’t get too greedy. If you’re lucky enough to have picked a winner, take your profits and go home. Sure you’ll often leave some money on the table, sometimes a lot of money if the stock price skyrockets after you sell. But you’ll greatly reduce your chances of turning a profit into a loss.
4) Related to taking your profits: also accept your losses and move on; just like you probably do with the rest of your portfolio. This rule can sometimes be more difficult to time when doing these types of trades. The impact, if any, of investor awareness campaigns on stock prices may occur immediately or some unpredictable time in the future. Set up a rule about when to take losses that makes sense to you and follow it.
5) As with all investments, don’t get emotionally involved with a penny stock.
6) Especially with these trades, never invest money you can’t afford to lose.

PaulKincaid

Part 3

As you can see, many things in the list are part of any successful trading strategy. Please see our related article:
http://www.stocktips.com/?s=successful+trading+strategy

At StockTips.com we profile penny stocks we hope will be of interest to investors with both long-term and short-term interests. We try to clearly distinguish between which company falls into what category.

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