Turning Penny Stocks Into Golden Opportunities
Looking for the next great penny stock? If youre a true do-it-yourselfer and want to make your own picks, plenty of websites explain how to find and trade penny stocks. Their lessons are usually sound too, even if a little predictable.
When it comes to really improving your results with penny stock trading though ” in a big way ” top traders know theres more to it than simply looking for solid companies and using technical analysis to enter and exit trades.
Here are four higher-level concepts to help you screen out the mediocre or low-odds penny stock trades you might have otherwise taken.
Is Management Motivated by Insider Buying or Ownership?
If insiders own a lot of company shares or sell a lot of their shares, you should pay close attention to the managements motivation. Owning a lot could boost the likelihood of success; selling a lot raises a red flag.
Information about how much stock a companys management owns is a matter of public knowledge. Publicly held companies generally disclose the breakdown in an 8K and/or Form 4 filed with the SEC.
Getting the Word Out ” The price of penny stocks are often affected as much by the publicity it receives as its fiscal success.
This isnt to imply an organization needs to post a news release every single day to garner constant attention. However, a company can only excite potential buyers by letting them know whats going on. And, it cant be a one-time event.
Consistent Volume, Mostly ” Is there actually going to be a market for this penny stock the day you want to get out, and at a decent price?
You never know what the volume on a penny stock will be day-to-day. It matters a whole lot, though, when you try to take profits off the table.
That said, high-volume breakouts are how new uptrends start, and dont necessarily need to be avoided. Quite the contrary, actually. A penny stock doesnt have to maintain volume levels seen during a breakout effort just to be considered liquid; the pre-surge volume just has to be respectable.
4. A Logical History.Any Logical History ” Could the company have been started on a whim, and fold for the same reason? Has the stock been trading long enough to at least provide a feel for how it trades or what the market thinks its worth? Or, has the company been sitting on a patent so long that its about to expire?
Most penny stocks are going to be of young, growth-stage companies, so a trader shouldnt expect a textbook example of a perfect investment. On the other hand, a company should be able to demonstrate that it will sooner than later bring a product to the market or turn a profit. (The same is also true with penny stocks of older, established companies though.)
Likewise, more than half of all stocks trade at a value under their IPO price within twelve months after their public offering sale. Thats not a problem for a true long-term investor, but it can make things challenging for a penny stock trader who wants to get in early shortly after an IPO. It can take a while for a new stock to settle in and start trading predictably.
Barring a crystal clear reason to make an exception to the rule of thumb, a publicly traded penny stock should offer a trader some sort of contextual history.
Thats it ” four simple concepts you can start applying immediately.
These four elements are not meant to replace a good trading discipline and chart monitoring. Use them in conjunction with sound strategy and youre likely to improve your track record as a penny stock trader.
Want even more details about trading penny stocks? The SmallCapNetwork.com site applies these methods in addition to specific stock picks. Subscribe to its complementary newsletter and reap the rewards of added knowledge.