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Strategies When You Trade Penny Stocks

Are you looking to trade penny stocks to earn a good return on your money? Penny stocks can be profitable for some, but it can also be a money-losing experience. What should you watch for when you trade penny stocks? What are some strategies that professionals and amateurs use when dabbling in the penny stock trade?

Technical analysis that uses statistics for forecasting price fluctuations is one approach. However, because it is difficult to track changes in fractions of a penny, there simply isn’t enough data to be able to analyze. Therefore, you have to keep an ear to the ground when you trade penny stocks. One of the biggest forces that drive penny stock prices is hype. Whether it’s online in discussion forums or chats, or offline with publicity and press, hype can cause swings in penny stock prices.

Tip: If you are a novice at the stock market, it is wise to start out using a cash account instead of a marginal account. It is less risky to start with a cash account because the losses can be controlled.

One technique that some experts who trade penny stocks implement is to focus on a particular stock. Get to know the stock inside and out; that is, get to know the company behind the stock, any news about that company, and anything else that might affect the stock price. Target one stock, listen to the buzz, and see how the stock responds. The louder the buzz gets, the larger the potential for a big price swing.

Many people who trade penny stocks are small-time investors who don’t have more than $1,000 of investment capital. These people trade penny stocks because it gives them more shares for the money. Where they might be able to buy dozens of shares in a major exchange such as the New York Stock Exchange, they can buy hundreds when they trade penny stocks. The potential for loss is big, however. It’s almost closer to gambling than investing. The money used is strictly risk capital. Once the money is gone, it’s gone.

Tip: Have an open mind when looking at a company's stock price. One particular rule in math that could not be avoided is that your earnings do not depend on the amount of assets you purchase.

Another subset of people that trade penny stocks are amateur investors who use the buy and hold strategy. They purchase a stock and retain it for long periods of time, hoping that the stock skyrockets at some point in the future. Unfortunately, this strategy hardly ever pays off in the way that the investor had hoped. In the long-term, the stock could end up being completely worthless.

Trading penny stocks can be a profitable, and even fun way to invest. It certainly isn’t a traditional method of investing, and is unlike old standbys such as bonds and mutual funds. However, trading penny stocks isn’t for all people. You should have a high tolerance for risk, a willingness to analyze every minutiae of your penny stock, and some intestinal fortitude. Have fun with penny stock trading, but don’t expect to stumble into the next WalMart for pennies on the dollar.

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