Investing in Penny Stocks: 9 Steps to Create a Successful Portfolio

Investing in Penny Stocks

Investing in penny stocks can be incredibly gratifying due to low stock prices, promising high returns and lucrative opportunities, however, behind the surface of hot penny stocks lies the dark truth of a high-risk penny stock market. A penny stock is rarely a penny investment per se; in fact, SEC identifies virtually any stock trading under a $5 cap a “penny stock” by definition.

Below we list 9 steps that will help you create a successful portfolio in penny stocks:

1. Get Educated about Risks Involved
Let’s be honest, investing in penny stocks is very risky, therefore stepping with your best-educated foot forward is the best approach for newbie investors. This is because companies that are just entering the market issue most penny stocks and there’s very little information available to investors as to their long-term performance, management or company’s goals. No track record means more risk for you. Penny stocks are traded three ways, on major stock exchanges like NYSE and NASDAQ, Over the Counter Bulletin Boards and so called Pink Sheets. The first two are registered with the SEC which enforces certain penny stock criteria before they can be offered for trading, the latter one is the riskiest ways to invest in these types of stocks because Pink Sheets are not under the obligation to follow a set of stock criteria. Those companies rarely if at all file any financial reports with the SEC making it very difficult for prospective investors to gain any information about their financials.

2. Understand the Basic Financials
Investing in penny stocks is by far not a rocket science, however it helps to know how to read through a company’s balance sheets, income and cash flow statements and telling a successful company apart from not so much. Some of the basic requirements for a successful company is to definitely look for annual revenues of $10 mil or higher, stocks that are traded over the counter and belong to industries that are comprehensible to you. Also companies that carry a heavy debt flow are not the most promising investments. Asset to debt ratio is also an important financial index not to overlook.

3. Open a Brokerage Account
Nowadays it is super easy to open a stock trading account and could be done virtually in minutes. With so many online brokers offering their services, how do you know which one is right for you? The most important things to consider are the account minimums, commission charges and volume of trading allowed. Analyzing and comparing these criteria will help you pick the right penny stock trader for you. TD Ameritrade, OptionsXpress and Charles Schwab are industry’s leaders when it comes to trading stocks online.

4. Start Small
This is perhaps the best piece of advice you will receive when it comes to investing in penny stocks. It is not worth taking a second mortgage to invest in this type of stocks, on the contrary, keeping a small budget in mind is always safer in case of unanticipated losses. A safe penny stock budget to keep in mind is probably somewhere around 5% of your entire financial portfolio.

5. Steer Clear of the Scams
Penny stocks are a Holy Grail of market scams because very little information is presented to the market about the companies. Most companies circulating in the penny stock sub-market are either micro sized companies looking to raise initial capital, those re-entering the market after bankruptcy, non-favorable stocks or downright scam artists looking to raise quick cash on the volatility of the stock prices. “Pump and dump” scheme has to be one of the most popular scams associated with investing in penny stocks. Initially, a so-called hot penny stocks list is sent via emails, texts or may even appear on TV or radio infomercials in hopes to draw interest and raise the price of the shares. With so much interest, there are usually many newbie buyers who see this as an opportunity for starting their investing in penny stocks. However, when the price is pumped rather high, the stockholders simply sell off their shares causing a significant drop in prices and leaving naive victim investors literally in the dump.

6. Stay in The Know
Investing in penny stocks is not a hobby but a business, therefore it is necessary to constantly track their performance, stay tuned with the new market trends and volatility. Joining a penny stock forum is a great way to stay connected with like-minded investors to exchange information and learn about new successful penny stocks entering the market.

7. Know When to Buy
Most investors keep track of penny stocks on the rise providing them with clues which stocks might be potential good investment opportunities, however when the stocks prices are high it is probably way too late to buy. There is really a very small window of opportunity when the price is just right to buy and when it is just too high to realize any potential gains.

8. Know When to Sell
Knowing when to quit is the ultimate key to a successful career of investing in penny stocks. Sometimes hours and even minutes can make a huge difference because stock prices are rather low to begin with. Savvy investors recommend sticking to a golden rule of investing in penny stocks and capping at 50% of a stock performance profits. Waiting too long may mean the stock prices will dip and potential profits can be wiped out.

9. Realize Low Liquidity
One of the biggest problems of investing in penny stocks is a low liquidity. When the time comes to sell, there may be no buyers available at the market to buy your investment. This may result in holding on the stock for too long leading to losses. Low liquidity should definitely be taken into consideration before deciding which

We hope that this article helps you understand the basics of how to start trading stocks whether you pick micro, mid or macro cap stocks. Continue reading about stock trading while staying at home in this article.