Because of the high risk nature of penny stock investing, successful investing calls for prudence and discipline. There is no forgiveness for mistakes and, if you can learn the common mistakes that investors generally make, you are enhancing your chances of success. If you cannot learn from the mistakes of other people, you are doomed to repeat the same mistakes.
The first mistake has to do with selling. Generally speaking your profits are determined by the price at which you buy and if you buy at a good price, you have a good chance of making a handsome profit. Nevertheless, you still have to sell in order to put the money in your pocket and this is where mistakes are commonly made. For instance, beginners and inexperienced investors often have the impression that they should send their entire penny stock holding at one go. Often, circumstances dictate that you sell part of your penny stock holding to take some of the profit and retain the rest of your position.
Whether you sell 20% or 50% of your holding will depend on the size of your investment and the future outlook for that particular stock. Don’t feel disappointed if the price continues to rise after you have sold. After all, you have a considerable profit in terms of cash in your pocket and the rest of your holding is much more valuable. Greed prompts too many people to hang on to their penny stock holding and risk losing all their gains. After all, you have made money on your trade and you can move on to the next one without kicking yourself.
You have to keep reminding yourself that you are dealing with penny stocks and if prices rise dramatically very quickly, and they are equally likely to fall as quickly and dramatically. You must always be prepared to take your decisions quickly because of the volatility of the situation. This is why you are likely to lose if you do not take at least some of the profit quickly. If you have realistic expectations of return, you are less likely to be disappointed by the perception that you have sold out too soon.
The other common mistake is in dealing with reverse splits. They can fool many investors and it is essential to understand the implications. You probably know about stock splits and how companies who are doing well benefit from the increased trading caused by the split. The reverse split is the opposite and can have the effect of increasing the price per share. It is often a sign that the company is in trouble and trying to maintain a minimum price in order to stay listed on the stock exchange. The effect is that companies trading in their penny stocks are extremely low prices can now achieve price is then begin to look a little more respectable even though the fundamentals remain unchanged. You actually have to live with the fact that your ownership share of the company has been drastically reduced and, in all probability, it is worth less than what you paid for it.