Knowing Which Penny Stocks to Buy

Learning to identify the right penny stocks to buy takes time, but like everything else, having experience will help a lot. You have to realize that these small cap stocks are not suited for trading strategies that you would use for normal stocks traded on the NYSE or the NASDAQ. Most of these penny stock companies are very small in comparison and not a lot of data about them is always available. Therefore, you have to exercise a different more strict set of precautions when trading them. The gunslinging trading style that makes good cash with the blue chippers would not do so well with penny stocks.

Even though knowing which penny stocks to buy can be very tricky, most seasoned stock traders like to keep a few of these stocks in mind for their retirement accounts. Although this would be dangerous for most ordinary investors to do, the professionals understand that penny stocks can offer solid returns on their investment dollar. There is nothing like finding a hot penny stock to make your entire year a profitable one.

But you have to realize that it is the experienced traders who understand the golden rule of stock trading. And that is limiting your risks by quickly cutting your losses. When you are patient and willing to cut losses quickly, that one big trade will eventually find its way into your trading account, and it will make all the difference in the world.

Rules for Finding the Right Penny Stocks to Buy

Given that these microcap wonders do not obey traditional rules, we must review the types of rules that the savvy investor should use before trading them. Let us take at look at these rules so we will know what to look for when evaluating and selecting penny stocks to buy:

Rule 1 – The first thing you should do is stay away from penny stocks that are listed on the pink sheet listings. If you have looked around and done any research on penny stocks at all, then you probably have heard about the pink sheets. Hopefully, you have learned about the risk that surrounds them. The reason that penny stocks from the pink sheets or the OTCBB are risky is that these companies are not required to file financial statements with the SEC. Think about that for a moment. Do you want to take their word for it when they tell you that their companies are financially strong?

This is the very reason that penny stocks get a bad name sometimes. These phony newsletters and email lists blast out crooked forecasts about certain stocks which are going to make a big move. After their subscribers jump in to buy the penny stocks and drive up the price, these crooks quickly sell their stock for a profit. The fact is that many times they are only paper companies in the first place.

Rule 2 – Do not go chasing dividends with these small cap stocks. If you are familiar with traditional stocks, then you should already know that dividends are best if they come from blue chip companies that are going to be around for the long haul. Companies that offer penny stocks are not the place to be looking for dividends in the first place. Keep in mind that even most normal stocks are terrible candidates for dividends. You have to realize that if a penny stock pays out dividends, it will most likely be a one-time payout.

Rule 3 – As with any other stock you consider, your research should focus on earnings and growth. Now there are two problems you will encounter. The first problem is trying to find financial sheets. Many of these companies will not have any data on the record because they are not required to file them. Stay away from these companies. They should be proud of their numbers. Number two, you have to realize that these companies are offering penny stocks as opposed to normal stocks for a reason. And the reason is not that they have been a great company in the past.  You have to realize that you will be looking for companies who are trying to make a comeback. Due to this, there is usually a lot of hype surrounding these small cap stocks as to future forecasts. This is something to consider when selecting the right penny stocks to buy.

Rule 4 – Never ever attempt to buy or sell a penny stock without using a limit order. If you mistakenly place a market order for a penny stock, you will never do it again. Always look at the spread before placing a trade. The penny stock market does not have a lot of liquidity and it really sucks to do a bunch of great research and decide on a certain stock – only to get killed on the order fill. Do not let this happen to you.

Rule 5 – Always place a stop loss immediately after buying a stock. Hopefully, if you have been trading normal stocks, then you already obey this rule. And as always, you will have to contend with the lack of liquidity; it is always a good idea to plan on getting a bad fill when your stop loss order is met.

Rule 6 – Always have a target price established before you even buy the stock. And when that objective is met, then get out of the trade and take your profits. Do not talk yourself out of doing this – do not let your sense of greed blind you. There is a reason for setting your profit objective where you did, so unless something drastic changed about the company, then you need to get out.

Summary

We are not trying to discourage you from trading penny stocks. You must remind yourself that many investors lose money when trading them. And they pose more risk to you than do normal stocks. This is something that traders have to consider when they are seeking out the best penny stocks to buy.

As with lots of things, if you are careful and use your common sense, then you will eventually make the right decision about which stocks to trade. And this means not trading with your emotions, just trade what the market tells you to trade. If you make a habit and accepting what the market gives you and quit trying to go against the market because you want to be right about your trading decisions, then you will do great!

 

 

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