Anyone can trade a penny stock.
But it’s takes a disciplined trader to trade that stock well.
One of the biggest issues facing all walks of traders is a severe lack of discipline and structure in stock buying habits, especially when it comes to cheap stocks. Many fail to use stop losses, or even protect gains with a simple trailing stop loss strategy. Others risk far too much.
A friend of mine once made 325% in a week’s time on a trade.
Then he risked it all on the very next trade that cost him 90% of that 325% winning.
That’s a recipe for disaster.
The allure of a penny stock is easy to understand.
You can make a lot of money from them.
But unless you’re willing to take the time to buy the right one you may as well flush your money down the toilet and wave goodbye.
Tip No. 1—Only Buy Stocks with Strong Balance Sheets
Like any investment, it’s essential that you identify the financial strengths of the stock before buying. In addition, understand:
- A company’s competitive advantage
- A company’s earnings growth
- A company’s sales revenue growth
- A company’s market share
- A company’s financial reserves
- A company’s product pipeline
- The quality of the company’s management
Tip No. 2 – Understand the Business
If you can’t explain what a company does, you don’t belong buying it.
It may be easy to explain what Coca-Cola (KO) does, but do you understand what a company like ACADIA Pharmaceuticals does and how its medication can assist with PDP, or Parkinson’s disease Psychosis? In short, if you couldn’t explain a company to a three year old, dig a bit deeper until you fully understand what it is they do, and how they make money.
Tip No. 3 – Diversify, Diversify, Diversify
We all know the saying ‘don’t put all your eggs in one basket’, but it’s essential to apply this rule when investing. Spreading your money across multiple assets means you won’t be depending too heavily on one kind of investment. If one of them performs badly, hopefully some of your other investments might make up for these losses.
A diversified portfolio can include large and small companies, different industries or sectors, U.S. and overseas securities, bonds as well as cash.
Again, anyone can trade a penny stock.
But it’s takes a disciplined trader — with a plan — to trade that stock well.