The story of the investor who bragged about a stock investment return of 100% or 10000% or about the guy who became wealthy by investing in small-cap stocks that were previously unknown has been told to all of us.
In theory, it seems too simple.
Invest in a few penny stocks, then sell them when they rise in value.
But that’s the problem: it’s way too simple.
If you don’t know what to look for, it’s too easy to lose money.
Here are some examples of common companies that trade on OTC BB and Pink Sheets.
- Nasdaq-listed stocks that have fallen below the $1 mark
- Companies that have fallen out of favour
- Even if things turn out better for them in the future, the odds are against it
- Trading in these stocks is generally not recommended
- If the temptation is too great, wait for the stock to recover
- A falling knife will hurt you if you try to catch it.
There are a lot of new businesses starting up.
Hundreds, if not thousands, of companies go public every year.
Companies with a compelling narrative and a proven track record are often well-positioned to go public, whether to raise capital for the company’s growth or to sell equity.
In addition to the IPOs, many of these companies will begin trading as penny stocks on the OTC BB.
This is followed by some advice for penny stock investors to avoid costly mistakes.
Annual or quarterly reports are not required of Due Diligence stocks listed on the Pink Sheets.
This makes it difficult to begin your due diligence.
When it comes to facts, they’re often incomplete or biassed at best.
You should expect a shareholder to praise the company.
There would be no reason for the company to be in this position if they did not have potential.
Alternatively, they may be trying to sell their stock and persuade you to buy theirs as a result.
OTC BB-listed stocks are required to submit annual and quarterly financial reports.
As a result, there is a semblance of financial gain.
The majority of penny stocks lose money, whether as a result of poor management or insufficient R&D.
Finding companies with a proven track record of making money or at the very least, delivering on their business plan and cutting costs is the most important part of the process.
Newsletters for Penny Stocks
What I can tell you is that you need to be careful!
Amounts paid to the newsletter will be disclosed in their disclaimer.
Is their compensation in cash or stock?
A correlation between the number of shares they receive and the hype meter’s rating is almost certainly there.
Do you have to avoid any stock that pays its IR staff in shares because of this?
No.
Just remember that they’re selling a storey, and if they can sell the storey to other shareholders, they’ll profit from it.
If you get in early, this won’t be a problem, but if you can’t get in right away, it could be a problem.
Take a look at the newsletter’s track record.
Is there a list of winners?
They don’t seem to be stating the facts, only the hype.
Are there any free stock profiles available?
Your chances of finding a financial advisor who does their own research on all companies and isn’t just passing along a weak stock to pay the bills are slim to none.
To what extent should you be wary of companies that pay an IR professional money to promote their stock?
No, there isn’t.
Think of the fee as a form of marketing.
They’re trying to get the word out about the company and get some publicity.
As with any business, the only way to gain recognition is through some form of publicity.
So don’t discount the value of a paid profile.
When you’re reading the profile, keep in mind that you’re looking for a potential match.
A diamond in the rough may be waiting to be discovered by you.
Volume
If you want to make money, you must be able to buy and sell a sufficient number of shares to secure your profit or safeguard your capital.
For example, if ABC company’s daily volume is only 500 shares, it may take you several days to build up a position worth taking.
Who will buy your stock if there is bad news?
Don’t go in if the volume is too low.
Putting yourself through that hassle isn’t worth it.
Contact the company directly if you’re so keen on owning it that you’d like to work out a deal.
If you want results, don’t buy stories.
If you buy into the hype, you may end up being the last person to own the shares, as everyone else has already sold theirs.
Observe a company’s business plan, and see if they have followed through on their promises.
Were they able to achieve their goals?
Did they meet their deadline for releasing a product?
Was the acquisition strategy carried out as planned by the company?
If you don’t keep an eye on your trading screen throughout the trading day, you won’t benefit from the hype.
Matters of size
Penny stocks number in the tens of thousands.
It is recommended that you do not take a position with a budget exceeding $2000– $3000.
Even though this may not seem like much, remember that a $0.10 company can easily fall to a $0.05 stock price.
That’s a 50% reduction in revenue.
If your salary is $10,000 and you take a $50,000 pay cut, you’re left with $5,000.
Limit the amount of money you lose.
You can either take your profits off the table or add to your position, and be sure to reset your stop loss to protect your previous gains if the company has performed well.
When it comes to making money in the stock market, capital preservation is essential.
Before making a purchase, make a strategy.
- Why did you make the purchase?
- Do you have a plan B?
- Do you have a loss-limit set up?
- It depends on how much you want to profit.
- Make a list of the answers to these questions before you place an order.
An investment in penny stocks can turn a profit.
Make sure to remember that you’re taking a greater risk than if you were investing in a bank’s stock.
Penny stock investments carry a high degree of uncertainty, but the rewards can outweigh the risks and leave you with a bad taste in your mouth.
Educate yourself, avoid falling prey to marketing hype, and keep your money safe.