You may have heard that trading penny stocks can make you money and, like any other form of stock trading, there are good stocks and bad stocks. These stocks are also called micro cap stocks and while you can find some penny stocks that trade on large exchanges such as NASDAQ, they will mostly be traded on smaller exchanges such as the Pink Sheets. Because these stock low prices typically below five dollars and sometimes a few cents, your absolute profits are small though your return in percentage terms can be large. For instance, if you buy a stock for one dollar and sell for two dollars, you have achieved 100% return on your investment.
The first step in making money online trading penny stocks is to train and educate yourself on how to handle it. There are a number of forums that will provide you with the necessary background and information and also attempts to identify websites that provide you with quality information. You will find that successful investors are also highly knowledgeable investors and spent a lot of time and effort in research and analysis. You are generally better off trading penny stocks that quote on exchanges such as the NYSE or NASDAQ but you need to be much more careful if you are trading penny stocks quoted on the Pink Sheets or the OTCBB.
Do not expect to get rich overnight and developed some sensible trading systems with proper risk management and the use of stop losses. The first thing is to ensure that you do not lose your trading capital in a short period of time. In developing trading systems, keep the following points in mind:
- Spread your risk over your portfolio and avoid putting all your eggs in one basket. In the first place, the capital that you allocate to penny stocks should not exceed 10% off your total investment portfolio. Even this allocated capital should be spread out over several stocks without taking a position in a single stock.
- Manage your capital carefully so that you always have some money available for worthwhile investment opportunities. Nothing can be more frustrating than letting an investment opportunity slip simply because you did not have the cash available
- Don’t trade in very small lots as your trading commissions will eat up your profits. For instance, if your online broker charges $10 per trade, you would have to make a return of 10% on your trade just to recover your transaction cost. On the other hand, if you make a trade of $1000, you only need a return of 1% to cover your costs.
- You should always make a reasonable investment in your trading account. A number of experts recommend a start-up investment of $1600 to cover three $500 positions at one time as well as the broker’s commission. If you are able to allocate more capital to penny stock trading, then you increase your chances of obtaining a successful return on your investment. However, keep in mind that this is capital that you should be prepared to lose.