The following 17 stock market investing tips apply to all stock markets, but they were honed and learned in the chaotic world of penny stock shares. There are lessons to be learned from a 20-cent or $2 investment that could never be learned from buying IBM or GM stock.
If you want to be a great investor, you need to be right in the thick of things. There is no better place to hone your skills, learn quickly, and constantly adapt than the highly volatile, fast-paced world of the smallest investments.
No matter what type of company or share price you're buying or selling, apply the wisdom of these 17 ideas to your trading style.
Important Points to Remember
- Although investing in low-cost stocks is not for everyone, all investors can benefit from penny stock trading lessons.
- Cutting losses early, letting gains run, not putting more money into a falling stock, and putting more money into a winning investment are among the lessons learned.
- Before you invest real money in penny stocks, try paper trading, which involves keeping track of the stocks you would have bought.
- If you decide to invest in penny stocks, only do so with money you can afford to lose.
1. Reduce your losses as soon as possible
Take the pain and rip it off in one motion, like a Band-Aid, when shares start to go in the wrong direction. Of course, every investment will fluctuate in value a little bit, but if the stock falls below your pre-determined loss threshold, it may be time to accept the loss and move on.
The stock will often continue to fall, making the early investors look wise. This also means that in the near future, you'll be able to buy back in at much lower prices.
2. Allow Gains to Run
Many stocks begin to move in the right direction and continue to rise. In most cases, the shares go far beyond what most investors would expect.
Some of America's most successful businesses began as penny stocks and are now worth $10, $20, or even $50 per share. If the company continues to grow, savvy investors will stay on board. Many others, meanwhile, sell far too soon, gloating over their 100% profit before crying as the shapes reach for the stars.
Re-evaluate the underlying company on a regular basis to avoid selling too soon. You may want to invest long-term if they are increasing their market share, revenues, and customer base.
3. Don't settle for mediocrity
Most investors try to compensate for their mistakes by increasing their investment in a declining stock. For example, if the stock drops 30%, 50%, or 88 percent in value after their initial purchase, they will buy even more of it. As a result, their average share price is lower.
This strategy isn't without flaws. To begin with, the investor was incorrect about the stock in the first place. Also, the investment is most likely falling for a reason, and it has a lot more downside to go in most cases. Furthermore, the investor has just risked a larger portion of their (likely) small portfolio on shares that are trending lower!
4. Raise the average
Averaging up rather than averaging down is often a more effective strategy. When an investor makes a purchase, and the stock begins to rise, they have been proven correct in their decision. The stock is rising, and an uptrend is usually maintained if the underlying company is doing well. Investing more money in a winning investment can often pay off handsomely.
5. Trade in Paper
Many people want to get into penny stocks but don't know where to start. They are also wary of the risks or are unfamiliar with the buying and selling process. The answer is paper trading. Keep track of the stocks you would have bought if you had real money. Paper trading will greatly affect your trading results and understanding of the stock market. There's no need to take any chances, and there's no need to spend any money!
6. The Single Most Serious Risk to Investors
We wrote an entire article about confirmation bias, which is by far the most dangerous risk for any investor. Before you trade another stock, learn about it!
7. Don't Put Your Trust in Free
Free stock picks are extremely risky, especially in the world of penny stocks. When these dishonest promoters try to dupe the masses into buying shares in their latest worthless company, hidden motivations collide with greed.
That's why their communications are always free, whether they're sowing seeds through the rumor mill, sending unsolicited faxes, or dumping dishonesty on you through free online newsletters.
8. Don't listen to friends' advice unless they're doing better than you.
Why would you put your trust in a life coach who is depressed? Why should you learn jiu-jitsu from someone who has lost every fight? Ignore everyone else and pay attention to the people around you who are doing well with their investments.
9. Due Diligence is a requirement
It would be best if you did not place a large wager on a casino game that you are unfamiliar with. Similarly, knowing where you are putting your money is critical if you invest in any shares, particularly volatile, small, risky penny stocks.
Any company has many facets, and taking the time to learn about them will ensure that you are not surprised by anything.
10. Purchase what you are familiar with
Too many investors purchase stock in companies they have no knowledge of. Focus on stocks you understand rather than the hot "nano-surgery neuro-electrode company." You will have an advantage over other investors if you understand how they make money, what they hope to accomplish, and where the industry is headed.
11. Concentrate on the Good Markets
There are some pretty bad marketplaces out there, especially with penny stocks, that are saturated with low-quality companies. Investing in companies listed on the OTCQX or Pink Sheets puts you at a disadvantage because a lot of bad investments surround you. Any investor buying shares on these low-quality exchanges are playing against the odds.
12. Stick to what works and abandon what doesn't
Whatever you're investing in and however you're doing it, you should increase your bets on the winning strategies while reducing your bets on the losing ones.
If you consistently make money mining penny stocks but lose money on exchange-traded funds (ETFs), it's probably time to shift your strategy to favor your winners.
13. Be Afraid of the Media
Generally, the "news" does not report what will happen, nor does it inform you of what is happening. The majority of media reports focus on what has already occurred.
They do an excellent job of making information appear current or relevant at any given time. Still, by looking at things from a different perspective, you can see which events are about to fade away, and thus your investment decisions will improve.
For example, before the dot-com bubble burst, the media focused heavily on dot-com stocks. Before the industry's collapse, a lot of attention was paid to marijuana penny stocks. In any case, the news is reporting on what has already occurred, not what is currently occurring.
14. Do Not Purchase Items That Everyone Else Is Purchasing
The act of buying in a mob mentality indicates that the investment is overvalued. You will never get a fair price for marijuana penny stocks, Bitcoin-related businesses, dot-com-era companies, or Dutch tulip bulbs.
Another unfortunate aspect of this equation is that the stampede is about to come to an end when the majority of people hear about the latest craze and jump on board. Within weeks, if not days, fortunes will be invested and lost.
15. Contact the Business
This is the most effective way to conduct thorough due diligence and learn everything there is to know about the investment and its prospects. Every publicly traded stock on the market has an investor relations contact who will gladly answer any questions you may have. It's completely free and could very well assist you in determining whether or not your investment will be profitable.
16. Be Truthful to Yourself
Perhaps penny stocks and investing are not for you. That's fine; spend your time and money on something you enjoy more. If you decide to invest, make sure you're doing so with risk money, so you can still pay your rent if the shares you bought start to lose value.
17. There Isn't a Silver Bullet for Investing
Investors frequently jump from one concept to the next, rarely making money in any of them. Maybe they'll switch to trading options if the "robot that picks stocks (scam)" doesn't work. If that doesn't work, they may resort to short selling. When that fails, they turn to binary options, derivatives, foreign exchange, commodities, and a long list of other options.
Pay attention to these 17 investment tips. They will quickly teach you how to trade stocks.