Buying Penny Stocks: The "Dos" and "Don'ts" of Penny Stock Speculation

So you are interested in speculating in the world of penny stocks? It's dangerous territory out there, however here are some tips that I have come up with to ensure that you give yourself at least a fighting chance of making money:

1. Speculate with money that you could easily afford to lose. "Penny stocks" will trade up and down and fluctuate greatly. If these moves have you sitting up at night with an ulcer, then you have too much of your money tied up in these stocks. Ask yourself how much you could afford to lose so that your quality of life wasn't affected at all if all of your penny stock investments traded to zero. You should invest no more than that. If you invest an uncomfortably large portion of your savings in penny stocks then there is a good chance that you will come down with an ulcer before you see a substantial return.

2. Do your own research. Tips from friends or your stockbroker are fine. However, you MUST do your own research before you buy shares in any company that someone else recommends. If you are comfortable with the stock after doing your own research then fine, go ahead and buy. However, if you blindly buy based off of someone else's recommendations, then you are bound to go broke. Remember that most people have an ulterior motive for giving these "tips", so be careful.

3. Don't invest in "broken" companies. If you are going to invest in a penny stock, try to focus on the companies that are up-and-coming with an exciting new product or service. Don't invest in companies that used to trade at $10 and now trade at $0.14. These are broken companies, and so many people are stuck in these companies that the share price would never be able to generate any significant momentum. Any time the stock would move higher, you would get a wave of selling as those who are stuck at higher prices finally sell.

4. Investigate the people that are in charge of the company. Have they been involved with other companies? Have they been investigated or sanctioned by a regulatory body? Do they seem qualified for the job of running a company? These are all questions that you should ask yourself.

5. Who owns shares? Are there any reputable and well-known companies listed as shareholders of the company? Any well-known brokerages or mutual funds or hedge funds that own a slice? If so, the company is automatically a better investment.

6. Search the company in Google. Any interesting information about the company turn up? Who is talking about it? Who is promoting it? Are there any discussions about the company on any of the major online message boards? You may find some pieces of information that require further investigation; Google is an amazing tool for this, and can definitely help to sniff out any potentially bad investments.

7. Lastly, diversify. Even if you are investing money that you can afford to lose, don't put all of this money into one company. Spread the wealth. There are plenty of interesting "penny stocks" to put some money into. Split your "speculative money" into ten parts. Invest no more than 10% of your speculative money in any one stock. Some stocks will rocket higher; some will tank to zero. By diversifying your speculative money, you give yourself a much better chance to succeed in the long-run.

Filed under: Stock Market Education | General Knowledge