It is easy to caution people to keep their emotions out of their trading activity but this is much easier said than done. After all, human beings are highly subjective so it is probably allow for your emotions into account when making your trading decisions. For instance, you may intuitively dislike a particular company and find it hard to implement your trading strategy for that stock. Other things that you should take into account are the time and effort required to implement a particular strategy and the trading capital that is required to make it work. You should also consider the impact of the loss of your capital and whether you have the patience to see your strategy through. Finally, you should ensure that you do not suffer sleepless nights as the result of a high-risk strategy. After all, penny stocks are high-risk investments.

Because it is often little hard information that is available, you need to use every scrap of information that you can find and then determine your entry and exit points. Unlike conventional stocks, you may not have enough information for the back testing of your strategy to determine your chances of success. Conventional investment-grade stocks can be reviewed at periodic intervals but this is not possible with penny stocks where developments can often be sudden and dramatic.

As long as you make sure you diversify your investment and don’t put too many eggs in one single basket, you can probably live with penny stock investing risk. You are going to have to work hard to gather information on potential investments but, if you do not do your homework, there’s a good chance that you will end up losing money. As experts never tire of saying, the line between gambling and speculation is the degree to which you can control your risk.

One of the most important parameters of investment strategy is the time frame in which you are going to trade. It is axiomatic that, the shorter the time frame, the better your control of risk. On the other hand, if you lengthen the time frame, it can be less stressful while reducing transaction costs. Frequent trading can be profitable but requires a great deal of intensity and focus. Because you are trying to exploit narrow windows of opportunity in penny stocks, you have to stay right on top of market developments all the time. Realistically, you can succeed with fairly simple penny stock trading strategies so there is no need to complicate things for yourself. In short, there is no substitute for sound common sense.

Like all stock valuation, the valuation of penny stocks is partly a science and partly an art. However, a bad stock is quite simply a bad stock regardless of whether it is a penny stock or not. Too much debt, high operating costs, uncompetitive products and services and ineffective marketing all go into the making of a bad stock. The approach to penny stock valuation differs from the valuation of large companies because you must have different objectives.

With large companies, you are looking to benefit from the appreciation in the share price. With penny stocks, you are often looking for candidates that are ripe for acquisition and hoping to get in on the ground floor. Even the prospect of a company in play, regardless of whether the acquisition is completed or not, will bring in larger investors hoping to profit and boost the share price. The trick is to get into the stock before they do.

Here are some valuation criteria that you might find useful:

• Look for improving earnings and a flat stock price. The improvement in earnings as a result of sustainable sales will ensure that the stock is bound to take off at some point in time. This is assuming of course that there are no other negative factors such as high debt and unsustainable costs.
• Look for companies with low debt levels. Many large companies will shy away from acquiring a penny stock company with little or no revenue and a mountain of debt. Large companies may even be tempted to pay a premium for companies with promising business models and low debt
• Find companies that implement share buyback schemes. The effect of a buyback is to reduce the float on the market and thereby increase the value of your existing holding. If the company operates buyback as a long-term strategy, your holding is bound to see a steady appreciation. The flip side of the coin is to avoid companies that are constantly raising capital and diluting the value of your holding just to stay alive.
• Look for penny stock companies with institutional holdings such as mutual fund investments… Not only will this confer respectability on the company but the presence of large shareholders makes company management more accountable. On their part, institutional investors will play an active role in promoting the fortunes of the business and thereby increase the value of their own orderings. Institutional ownership is rare but you should try looking.

-The first misleading tip that you will encounter is to buy companies that make products that you love. In the first place penny stock companies normally small companies and you are unlikely to be familiar with their products or services. Generally speaking, another key factor in profitability is the price and you will generally tend to overpay for stocks that you really want in your portfolio. A company that produces a product that you love may be a great buy at $100 but a terrible buy at $250. This kind of concentration on a single factor instead of analyzing the situation as a whole requires you to buy the company whose products you love regardless of the price and this is a surefire recipe for disaster.

-The second misleading tip is to buy companies who are in businesses that you are familiar with. Now experienced investors who have the experience of dealing with a range of companies will not find it difficult to practice this. However, if you are a newcomer to investment, you are severely restricting the universe of your investment to only the businesses that you are familiar with. Normally, this would leave you with very few investment options. Besides, you cannot manage risk with diversification because of the restricted investment opportunities. Moreover, penny stock companies are often start-up or new businesses where you may be entirely unfamiliar with a product or service being offered. You may actually miss the chance of getting in on the ground floor on the next Microsoft or Apple though, admittedly these opportunities come far and few between.

-The third misleading tip is to concentrate your energies on diversify your portfolio. It is true that in the case of penny stocks, diversification is a must because of the high-risk nature of the investment. A diversified penny stock portfolio does offer the advantage that if you hit a home run even on one stock, you will offset the losses that you make on the others and probably show a handsome profit besides. Proper diversification requires a great deal of knowledge and planning and the selection of the appropriate stocks is critical to the process. If you diversify for the sake of diversification, you are likely to end up holding 10 dud penny stocks instead of a couple and the results will be just as disastrous.

Penny stock investments are perceived as extremely high risk investments and there are statistics that suggest that something like 70% of penny stock investors lose money. You should be prepared never to see the stocks or your money again. The problem is compounded by the accusations against a number of stockbrokers who deal in penny stocks and have been accused of fraud and dishonesty. This is one reason why many reputable investment firms refuse to deal in penny stocks. Of course, there is always the consolation that you can chalk up a sensational rate of return if stocks that you bought for pennies are sold even for a few dollars each. Moreover, you only need the few winners in your portfolio to achieve an achievable rate of return on your entire penny stock investment.

If you are buying penny stocks:

• Carry out a thorough examination and due diligence on the broker from whom you proposed buy the stocks. If you find that your broker is using unnecessary hard sell or promising you insider information or making unrealistic claims about your returns, walk away from that broker. A respectable broker will honestly tell you that penny stocks are high risk instead of trying to con you into a supposedly safe and lucrative investment. You can also check whether customers have complained about the broker or have commenced legal action.
• Research the company in which you propose to buy stocks. Check that the management is experienced and reputable, operates in a sector that is doing well, provides quality products or services and has a business model that provides a decent chance of success. Unless all these factors are present, the company is likely to go bust and take your money with it.
• Many brokers and unscrupulous middlemen will use any means to inflate the prices and, unfortunately, the Internet lends itself admirably to manipulation. You can plant false or misleading information and create a buzz on many forums and bulletin boards in the hope of enticing investors. These conmen would have acquired large quantities of stock which they will offload at the inflated prices. When prices tank, as they must, you are left carrying the can.
• Make sure that your investment in penny stocks account for no more than 5% to 10% of your total portfolio and that you can afford to lose this money entirely. If your expectations stay realistic and you do not get carried away by greed, there is no reason why you should not make money on your penny stock portfolio.

In this economy, stocks are falling, have fallen, or have already bottomed out. The smart investor knows that now is the time to spend money, when those stocks you could only dream of owning are now half price or better! If prices are still to high for you, consider buying cheap penny stocks as a great way to get your feet wet. If you are seriously interested in the stock market, but lack the capitol for a real attempt, then penny stocks are for you. Penny stocks can be a bit of a risk though, so at this point you may be wondering why you should invest your hard earned money in a risky venture that already is likely to fall?

You have to understand the system. To start, the main reason penny stocks are so risky is that a company who offers them is quite often already in a shaky situation financially. But, this isn’t always the case. If you search around a bit you can find healthy companies who are offering their stocks very low to get started. This is where you can make a killing. Even if a company isn’t thriving financially, you stand to loose very little on individual stocks since you are only investing… pennies!

Make sure you research the company well before investing, if you want a big payoff, the money is in the research. If the company you are researching doesn’t look like it will survive this recession, then likely it is not a good investment for you, look long term and you will see a bigger picture.