A few weeks ago, Bloomberg reported an interesting story about a $35 billion company with no assets. The company, Neuromama, had its market capitalization move to $35 billion in the Over the Counter (OTC) over very small volumes. The Securities Exchange Commission (SEC) moved to halt the trading of the company because its filings did not make sense. Similar cases have been reported for similar companies in the OTC market. Welcome to the world of penny stocks trading. Penny stocks trading is related to small companies that raise their funds mostly in the OTC market. The companies are mostly valued at less than $10 million. For such companies, it is very difficult for them to list their shares in the large bourses such as the NASDAQ. These companies are price at less than $5 a share. You will be surprised to find companies with shares trading at $0.003. The benefit of trading in penny stocks is that you can make a lot of money on small movements. For instance, if you have $1000 and spot a company trading at $0.5 a share. This means that you can buy 2000 shares. When the share price moves from $0.5 to $0.9, you will have almost doubled your money. The downside is that you can lose a lot of money if the opposite happens. In this article, I will present a few tips on penny stocks trading.
#1 - Short Term
In the financial market, you can decide to trade for the long term like Warren Buffet who holds companies for decades. You can also trade shares on an intraday basis. For penny stocks, it is not advisable to trade for the long term. This is mainly because the regulation in the penny stocks. In the listed companies in the NASDAQ, the regulations are usually a bit tough. For instance, companies must disclose a lot of information to the shareholders. In penny stocks, this is not done. Therefore, you should spot an opportunity, enter a trade, and then exit as soon as you make some money.
#2 - Stop Loss
A story is told of a trader who opened a trade before going to a meeting. He sold short a pharmaceutical company called Kalobios. The trader shorted the company and then went to a meeting. A few minutes later when he came to his trading terminal, he was negative $106,000. Previously, his account had $37,000. He forgot an important aspect in trading. The role of a stop loss. A stop loss is a tool that gives you a chance to stop the losses at a certain level that you have determined. As a penny stock trader, you should always ensure you have a stop loss. This will help you protect huge losses.
#3 - Trade Moderately
In penny stocks trading, you should always trade for a few times per day. If possible, you should trade just once. This is a concept I have promoted for quite some time in all forms of trading. The more you trade, the higher the risk you expose yourself to. I have stated before that I try my best to open a maximum of two trades per day. Even when you are having a winning streak, you should slow down, take your profits and then trade again the following day.
#4 - Companies You Understand
There are many high quality companies in the penny stocks trading world. These are companies with quality product and services and low debt. As a penny stock trader, you should try and identify these companies and trade them. The benefit of this is that it helps you limit your exposure to toxic companies that are volatile.