Friday, 4 January 2013

Penny Stocks - Are They Worth Trading?

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Penny stocks are low-priced securities that are currently trading below $5 per share. Often times these stocks have fallen from much higher prices and now trade thinly with low volume. Penny stocks are no longer listed on the major stock exchanges, and are traded on OTCBB or Pink Sheets.

Why trade Penny Stocks

Penny stocks allow a speculator the ability to purchase a large number of shares with a relatively small amount of money. The speculator, then hopes to receive a quick pop in the penny stock, which will yield a large return on their initial investment. If a speculator has a strategy for trading penny stocks, it can be successful; however, the odds of succeeding at this game are slim to none.

Biggest Lie about Penny Stocks

How many times have you been on a yahoo stock message board and see a post saying, "buy XTYLXE, it is set to rally over 2000%. Or what about the emails you receive from Bob123 telling you that some biotech stock is going to get their FDA approval in the next 2 days? Most of you reading this article probably tag these emails as spam and then move on with your lives. Have you ever stopped to ask the question, why do I keep getting these emails? Are people really buying these stocks? Well the reality is, for every "x" emails sent, there are a few people who actually take action. I think you know how the story ends for these poor souls.

Reality of trading Penny Stocks

If you actively trade penny stocks, it is basically a form of gambling. Just stop to think for a second about what you are doing. You are trading a stock that has little or no trading volume, which means there is no public interest. The stock is not listed on any of the major exchanges, which means you are not protected by all of the rules prescribed by the Securities Exchange Committee (SEC).  Lastly, if a stock only costs .25 cents per share, you get what you pay for. Most speculators do not have the money management principles to successfully trade penny stocks. Often times, traders will continue to go all in on every penny stock trade, and then after 8 wins in a row, the 9th trade will take them out of the game.

How to protect your capital

If I have been unable to sway you from trading penny stocks, please use the following rules:
* Make sure the stock trades a minimum of 1 million shares per day over the past 30 days  * Make sure you can look up the chart of the penny stock in order to identify support and resistance levels  * Has a minimum of 100 million market capitalization  * Do not follow any tips from spam emails or message boards  * Do not put all of your money in 1 trade  * Only use .5% of your total portfolio value for all of your penny stock trading activity

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