5 Penny Stock Tips

There are no shortage of advice when it comes to investing in penny stocks, as everyone from your next door neighbor to celebrities offering “hot penny stock tips”, and the promise of a “sure thing”.

When looking for suitable penny stocks to invest in, make sure you avoid the scams. I have had many unsolicited emails from people telling me about the “next hot penny stock”. These are usually scams aimed at manipulating stock prices.  Unfortunately, falling for one of these scams can result in loosing a vast majority of your investment – if not all of it.  It is advised that you shy away from all penny stock recommendations, and always conduct your own research.

Stock screeners are often very helpful for ligitimately finding penny stocks. You just need to set them to find stocks that are priced under $5. Zacks and Yahoo both offer free stock screeners.

Be prepared for all possibilities

This is perhaps one of the most important penny stock tips. If you have read any of the other penny stock pages on this site, you will be aware of how risky penny stocks are. You might find the next microsoft or the next google, but you might lose a substantial portion of your investment. Make sure you will not be significantly affected financially if the worst case scenario does happen.

There is always the very real risk of loosing 100% of your investment when you invest in penny stocks, so proceed with extream caution.

Have a trading plan and stick to it

Be disciplined on your entry, even if it means waiting days, weeks or even months. Never open a trade just to “be in the market”. Decide on a target price and exit if it is reached. Try to avoid letting your emotions get the better of you. An emotional trader is always a losing trader in the long run.

When you invest in penny stocks it is always wise to consider using limit orders, stop-loss and stop-limit orders, and even bracket orders to automate your trading and hedge against risk.  Trading penny stocks often means that you must make a move quickly if your position moves against you, and it is not always possible for you to monitor your investment constantly.  Automating your investing also eliminates the possibility of emotional trading, as your orders are exicuted automatically when your preset peramitors have been reached.

Find a good stock broker

Another important penny stock tip I would like to share is choose your broker wisely. Many stock brokers are very expensive when you trade penny stocks. They impose additional fees for low priced stocks. For example at the time of writing this article, the stock broker Tradeking charge an extra $0.01 per share for all stocks priced under $1. Optionshouse charge an extra $0.01 per share for all stocks priced under $1. ChoiceTrade is one of the few brokers that have no extra charges for penny stocks.

These extra fees and commissions can quickly add up when trading penny stocks, and should be taken into consideration when developing your trading plan.

Do your research

Before making a decision on buying penny stocks, take your time to research the company. Look at factors like:

  • Is the company profitable?
  • What debts does the company have?
  • If there are debts, are they manageable?
  • What assets does the company own?
  • How competitive is the company in it’s field?
  • How stiff is that competition?
  • Does the company do something unique to make it stand out?
  • What does the balance sheet look like?

The old saying “failing to prepare is preparing to fail” is very true when it comes to buying penny stocks.