The definition of a penny stock is any stock that is trading under the price of $5.00 per share. These stocks are high risk to trade and usually move based on speculation. However, if you can find the right ones to trade they can be very profitable.

The best penny stocks to trade are the OTCBB (Over the Counter Big Board) and the Pinksheet stocks. This is because stocks that trade in the major markets (NYSE, NASDAQ, etc.) are most likely stocks from companies that are losing money or have little growth potential. Also, OTCBB and Pinksheet stocks are most likely newer companies developing a product and once they are established they will move to one of the major markets.

When screening for a good penny stock to trade you should look for positive single day movers with higher than average volume. Make a list of 10-20 socks you find like this and than start looking at what the company does. Look for companies that are developing new technology or a product that is innovative such that their competition will be minimal, if any, when their product is lunched or implemented.

Besides looking for good companies to trade you can also look for good charts to trade. Look at short-term (1-month to 3-month) and long-term (1-year to all data) charts to find the overall direction that the stock is trading. Do not try to fight the overall trend; a stock that is in a long-term downtrend is likely to continue down. You are looking for steady uptrends and predictable patterns. Steady uptrends are the easiest and best ones to trade. Draw two straight lines that go through most of the peaks and valleys to find the trading cannel. Buy the next time the price hits the bottom line and sell when it nears the top line. A nice predictable pattern is the ?N? pattern. Trade this pattern when you find an indicator that it is about to move back up. A good indicator is a Doji candlestick, which is a trading day with a tight range and opens and closes at, if not exactly at, the same price. Another good indicator is after a big down day the price closes at or near its low and than opens there or higher the next day and close higher.

Because penny stocks are high speculation plays you should be getting in and out as soon as you realize some good profits. If you get lucky and can take a 30-40% profit in one day you should take it. After a move like this the stock is liable to comeback 15-20% the next day. If you still like the stock you can get back in and make an even bigger profit than if you were to just hold it and it moved back up.

Trading penny stocks can be exciting and profitable. Always remember that these are high risk stocks to trade and never put all your money into just one stock. Do your research into the company after you find interesting charts to trade to save time. Search penny stock blogs and forums to find ones with a lot of chatter and never rely on someone else’s pick, do your own research.

The Nature of Penny Stocks

For anyone new to investing in penny stocks, you should first be made aware of the differences between these micro-cap stocks and the more conventional blue-chip and mid-cap investments. Unlike buying shares in a large, stable company like Ford or IBM, you are dealing with speculative investments.

Penny stocks literally trade for pennies per share, or for as much as a couple of dollars. The beauty of penny stocks, of course, is that sometimes they ‘grow up’ and become mid-cap stocks, multiplying in value hundreds of times over and making many people very wealthy.

With penny stocks, also called micro-caps or juniors, you will see much greater price volatility, and thus greater and quicker gains and losses in asset values. It is precisely this volatility which draws investors to the junior markets, as one good pick could make you hundreds of times what you could ever make on the larger markets.

Of course, there is more risk than buying bonds, blue chips or defensive stocks – but this added risk is tempered with the possibility of making the big gains.

 Most penny stocks, but not all, are resource or technology companies who initially sold shares in an effort to raise money for exploration or product development programs. Many of the companies have large debt loads and are not necessarily making more money than they are losing.

However, it is the potential of a major, or even minor success in their quest that often incites dramatic price climbs, and this is where their value lies.

Profit Potential

Promotional Stocks – These issues may or may not have much actual value. Promoters generate interest in these types of stocks in an attempt to drive share prices higher. The promoters own great amounts of shares and so they make more money the higher the share price travels. Eventually, they sell their holdings into the promotion and generate great personal profit. Then they move on to the next project, leaving the original stock and all its investors behind. Without the work of the promoter, the promotional issue soon comes crashing down.

These are the type of stock investor hear horror stories about, because many people often lose a good deal of money when they are naive about promotional ploys. However, getting in on a promotional stock early in its life cycle, and keeping an eye on the actions of the promoter can be very, very rewarding. It’s like having a full time stock promoter doing everything in his power to get the share prices of the stocks you own to go through the roof, and investors who get in early can go along for the ride!

Technical Precursors – Often technical analysis can reveal patterns in the trading cycles of penny stocks. Sometimes these patterns illustrate excellent buying opportunities, where the underlying stock has a high probability of moving up strongly, and only a low probability of declining in value.

In addition, there are sometimes situations where several positive technical indicators combine at once to reveal that an issue is very likely to increase strongly in price over a short time frame, indicating that the particular issue is has excellent investment potential.

Fundamental Strength – Fundamentals involve such criteria as earnings, debt load, assets, and many others. It was long thought that earnings were the major driving force behind share prices, but Modern Strategies Inc. has since disproved this theory as it applies to penny stock companies. Instead, uncovering the best medium to long term investment opportunities must be done through exhaustive analysis of company financial statements. Investors should get involved with the companies that are making the most money, have the most effective management, and have improving trends in all factors of their operations. As well, industry comparisons and the examination of key financial ratios present clues as to which companies are destined for higher share prices.

Proper fundamental analysis of penny stock companies will generally reveal that there are about 2 or 3 superior investment opportunities out of every 100 companies examined. These 2 or 3 excellent corporations often represent better investments than 90% of stocks on the large-cap markets like the NYSE.

Undervalued Situations – Sometimes companies see their share price slide dramatically. There are occasions where this decrease in price has very little to do with the underlying fundamentals, and more to do with factors such as overall market weakness, interest rate increases, or others.

Opportunity exists in such situations because the shares are often ‘unfairly valued’ and a return to more realistic prices is inevitable. There are often cases where companies have more cash on hand per share than their share price, or have price to earnings ratios as low as 5.0. Although there is much more to uncovering the best undervalued situations, this is the basis behind the concept.

Minimized Downside – Often the combination of technical analysis and undervalued situations can reveal penny stock companies that have tremendous upside potential, and have a very low probability of declining in value to any significant degree.

These type of investments are excellent choices for penny stock investors that are less risk adverse.

Special Notes About Penny Stock Companies

Penny stock companies change their names more commonly than other publicly traded companies, and are also subject to more stock-swaps and consolidations. In any of these events, your shares in your account will be automatically replaced with the appropriate stock by your broker and notice will be delivered to you.

For example, if you owned 5000 shares of EXO and for every 5 shares you were to receive 2 shares of LOR, you would find your account holdings re-adjusted to reflect 2000 LOR which can be traded as normal. You will no longer have the 5000 EXO.

On rare occasions, a penny stock company can become delisted. This means that the shares will no longer trade on the exchange, and if the company does not get listed on another exchange or re-instated at a future date, you may be subject to a loss of capital equal to 100% of the total investment. However, this is a very rare occurrence, and there are simple ways to protect yourself against it which are periodically discussed in Modern Strategies Inc. publications. Delisting generally becomes a greater concern for investors who intend to use a long-term (several years) buy and hold strategy with penny stocks.

Why should the rich guys have all the fun? The small investor can seek out huge returns too…if they know how.

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.

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?

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.

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.

And remember, as with anything else in life with high potential for gain there is also high potential for loss. Do your homework, follow your rules, and plan to prosper.

The Forty-Seven Sides to Every Argument
People that think there are two sides to every argument, two ways to interpret every set of data, haven’t met many stock promoters and haven’t read many corporate press releases. In financial markets there are thousands of different factors at work, hundreds of different interest groups, tens of potential interpretations on the information that actually makes it through the screening, omissions, and exaggerations. And most importantly, there is only one you. It is you who has to filter and summarize the facts and opinions that reach your ears, discard they misleading, ignore the unimportant, isolate the lies…

With success at interpreting all of the overwhelming amounts of information you receive about a stock, you could be very good at picking winning stocks. But who can you trust? What sources of information are honest, and which are blatant lies. And of course, the hardest to spot are those slight exaggerations.

Let’s start with a look at the least dangerous information sources, The Media, and progress towards the most vile, purposeful, and persistent terror in the world of penny stocks, The Promoter.

But The News Said So!
If you learned all the hidden forces at work in what the media screens and puts out, and knew of all the interest groups and advertisers with their hands on the strings, your jaw might drop. Spend 10 minutes talking to a public relations specialist, and ask them how the magazines, newspapers, and television shows decide on what to publish. The truth is that the media are not even close to being partisan or unbiased, and while they often base things on fact, they derive their influence, and thus their danger, through the spin they put on their stories, and more importantly the facts that they leave out of them.

Unfortunately most people think, “I saw it on the news, so it must be true.” That car review you read in the national newspaper – a paid advertisement. The pre-Christmas hype about the shortage of Teletubbies, or Play Stations, or Pokemon… purposeful and well planned. In fact, almost all newspapers and television networks have a certain political alliances, and act and report accordingly to support their interests.

As well, media likes to jump onto similar stories all at the same time. For example, when the Internet was in its days of unbridled growth, all you could read about was the successes that the dot coms were having. When the party was over and the Internet companies began to collapse, all you read or heard or watched was about how the sector was crashing down. But what about those Internet companies that were doing badly when most were soaring, or doing great when most were collapsing. There were many of them, but it wasn’t considered newsworthy at the time.

How does this relate to penny stock investing? In the dot com example above, it is likely that the media helped produce both the irresponsible buying frenzy that drove prices to ridiculous levels, and helped exaggerate the subsequent selling which sent many dot coms to unbelievable bargain levels.

The bottom line is that it is important to interpret what each separate media corporation decides to feed you. They are all independent companies that are going to act in their best interest. You need to do the same.

We Prefer To Call It “Down-sizing”
CEOs and corporate representatives have an incredible way of putting negative things into a positive light. You say, “You aren’t making any money and are laying off 40% of your staff.” They say, “We are very optimistic that our corporate restructuring will help us achieve our goals.”
You say, “The additional stock offering will dilute stocks, and per share values.” They say, “We are excited to increase liquidity and raise additional funds.”

Also be aware that even audited financial statements can play with numbers, and attribute costs to different categories and offset costs, etc… For example, a company that sells an asset for a one time gain can suddenly be showing that income in earnings, giving the appearance of a trend, or masking a drop of earnings when the external item is not factored in.

I Heard a Great Stock Tip at Work
No you didn’t. When you are in this business every one you talk to suddenly becomes an expert. These are people, some of whom have never even traded a stock for a gain, or traded at all. Literally, 9 out of 10 tips are bad, especially if it involves a tip from a guy who knows a guy, or someone “on the inside.” In fact, insiders do not relinquish vital information for everybody to profit from. They keep it to themselves.

So then where do this stock tips come from? There are actually hundreds of professional promoters out there whose jobs are to instigate and fuel these ‘tips’, and it is amazing how the ‘hot tips’ spread like viruses.

It has proven difficult for professional traders to turn consistent gains and uncover winning stocks, so how could the guy at the water cooler be very good at it, especially when he hardly invests?

Take the advice of these people if you want, invest in the hot tips if you want. Just do yourself this one quick favor: next time someone is giving you a stock tip, ask them what the company’s revenues are at, and how much long term debt they have. If they can answer these questions, ignore all our comments presented here. If they can’t, read these comments one more time.

Where Information Goes To Die
We highly discourage even visiting the message boards. Never in the history of civilization has there been a greater forum of mis-truth, inaccuracies, and uneducated commentary. Only a tool as powerful as the Internet, and with the reach of the world wide web, could have the capability to accomplish this. It is kind of like the “Hell” of information.

Promoting Their Own Best Interest
There are promoters out there who get paid a huge amount of stock options with one goal in mind – drive the share prices up so that the option values make them rich. How they drive the prices up is besides the point to them, and the problem. Often dishonest practices come into play.
The worst of the bunch are the high-pressure sales people who call you in person on the phone and try to get you to buy. Their tactics are well-honed, and they leave you feeling frenzied, excited, and impatient to dump your life savings into whatever miracle stock they are touting.

There are a hundred things wrong with buying these stocks, so we won’t even entertain the concept of discouraging you through explanation. Just to give you a quick comment to demonstrate what we mean, try and sell the shares you bought off of a telephone promoter. Good luck.

In fact, we highly recommend the following items if you are interested in the work of promoters: The movie (now available on video) called “Boiler Room,” and the book “Rampaging Bulls” by Alexander Taadich.

So What Can I Trust?
You should judge each individual piece of information on its own merits, as long as you keep in mind to not accept everything you hear without question. Do your own due diligence on every stock you want to invest in. Call the company up, get the investor relations contact on the phone, have them fax you their financials, read their press releases.

In the end, it comes down to a simple acid test. Assume you bought a stock that went down strongly. If you would you be mad at someone else about it, like the person who gave you the tip, you didn’t do sufficient due diligence. If you only had yourself to blame, then you probably did enough due diligence.

The Penny stock Mentality

So what type of investor trawls penny stocks?

• He’s willing to buy a 9¢ stock that’s 9¢ because nobody else wants it.
• He’s willing to wake up in the morning and find his 9¢ stock now 4¢, or his 50¢ stock now 28¢ and still enjoy his breakfast profusely, because he knows he’s picked a winner.
• He’s willing to average down from 50¢ to 9¢ and will buy heavily at 9¢ so the great majority of his stock is purchased at the cheaper level. Hey, he believes in the stock. Of course, the stock slips from 9¢ to 6¢ but that is of little consequence–he knows he’s gotten in near the bottom and nobody hits the exact bottom anyway.
• He loves his penny stock, but when he has a double, he sells half no matter what. And he’s invariably happy in the end by his tactic.
• He finds while doing his DD (due diligence) that one of his tech stocks he just bought a load of is spending more money on plane fares seeking capital from Europe, than it is developing its product, so he dumps it all immediately even though it just dropped 25%. And he figures he’s ahead of the ballgame. The stock has a 5 for one reverse split and he celebrates the fact that he sold his remaining little stake at a 75% loss instead of the 95% loss that would happen just a week later.
• He gets bored with his penny stocks and ignores them for a few weeks and looks at his statement one day and finds a 70¢ stock of his that had lost half its value over a period of 3 years now is over $4 a share and his hand is shaking as he calls his broker to sell. The same stock is $12 a share a few months later. Then $1 a share a couple of years later.
• He buys a 2¢ stock because he knows that the shell alone of any penny stock is worth 2¢ a share for companies trying to avoid the hassle of starting a corporation from scratch. His 2¢ stock goes into a 100 to 1 reverse split.
• Surprisingly, his portfolio rises slowly over time and penny stocks are still better that no stocks at all.

The term “penny stock” is defined as:

A stock which sells for less than one dollar per share (or in some cases, less than five dollars per share). Most penny stocks have only a few million dollars in net tangible assets and have a short operating history. Penny stocks are almost always small cap stocks, but the reverse isn’t necessarily true.

Penny Stock Warning

Penny Stocks are cheap for a good reason. Most financial advisors advise against buying penny stocks because most people lose money, the commissions are huge and they are subject to price manipulation due to the small float. Thus, I tell people to consider buying penny stocks as gambling. NEVER buy more than you can afford to lose and consider the purchase as a trip to Las Vegas where you have a budget on what you can afford to lose at the gaming tables, including air fair and lodging.

The Detriment of Emotions

Too often our detrimental emotions get the best of us, and have serious and direct impacts upon our trading strategies. This feature takes a look at how the investors just wanting a little more often wind up getting a lot less.

For example, holding a penny stock that makes you lose sleep at night can often cause you to make irrational trading decisions. Trying to get one big score may make you pass on taking a respectable gain when it is available to you.

By taking the emotion out of investing, your odds of profiting are far greater, while your chances of making impulse or irrational decisions are significantly reduced.

An Interesting Thing
There is an interesting thing about greed, and you may have seen it yourself a few times. Greed has no top. Greed has no point of satisfaction. That’s why there are horror stories about investors sitting on 1000% gains, only to continue to hold on as profit takers begin sending the price back to earth.

However, if that same investor had been asked what type of gains he or she would like to see from the penny stock BEFORE they actually invested, they would almost certainly come up with a number far less than 1000%. This leads us into our next point, and why it is so important.

Aim Before You Shoot
When you first buy a penny stock, set realistic and specific targets of when you will sell. Whether it is after an increase of 40% or 200%, you should know them and stick to them.

It is OK to set a target sell point at 40%, then increase this if the penny stock starts rocketing toward 100% gains. But don’t use the penny stock’s move as an excuse to throw your original targets away and hold out for 200% and 300% profits.

In fact, review our feature Cashing Out for concepts on selling a portion of your holdings after the penny stock has made a good move, which locks in your profits, but still lets some of the money ride.

Adjust Your Aim
Having said that, make sure to factor new press releases, financial statements, and market conditions into your target sell prices. It is OK to adjust them higher if the market suddenly gets hot, as long as you are also willing to set them lower if the markets begin to run into a downdraft.

For example, a strong earnings report may mean that you would be willing to sell at a level 20% higher than you had originally believed would make you confident with your trade, rather than thinking ‘now I can really rake it in,’ or ‘I could probably get…’

In other words, the bottom line must always be to focus on achieving gains that you are happy with, and that are in line with your original expectations for the shares. Act on expectations, not hopes.

Sure-Fire Solutions and Tips
You may benefit from using stop loss orders, although these have rarely proved effective for penny stocks with low trading volume. A stop loss simply says to keep the shares if they continue to climb, but sell if they sink to your strike price. This method can enable a trader to limit their risks, but still enable them to capitalize on any upward price movement.
Remember that it is better to sell too soon than too late. If a penny stock continues to climb, you should remember that profit takers can move in any time to lock in their gains, and if they sell before you do you’ll be looking at lower share prices while they are off counting their profits. Every dollar that a share climbs convinces more and more traders to start taking their profits. You need to be among the first.

Once you’ve sold, don’t be upset if the price continues to climb. When the shares are at a profit level you are happy with, take the gains and don’t look back.

This type of regret is nothing when compared to the type that comes from wishing you had sold before the price plummeted. There will always be a million what-ifs in the market, but it’s all part of the game.

A Need To Know Basis
Too often investors buy shares in a penny stock armed with little more than the ticker symbol and a tip from a friend at work. Why not arm yourself with the best possible information, especially when it is all there at your fingertips for free?

Here are the bare bones factors that are important to know about the company you are going to invest in, and how they can impact the prices of shares.

Revenues
This is how much money the company is making.

Many penny stocks may not have revenues at all if they are in the development stage, or if they are trying to bring a brand new product to market.

However, if the company has been around a while they had better have enough revenues to offset some of the costs. If the company is in its growth stages, there has to be an increasing trend in revenues. If they are trying to gain market share, or break into new markets, their success should be tempered with improving revenues.

Earnings
Of course, revenues are just a precursor to earnings. All companies want to eventually make money, and it is when they start bringing in more revenues than costs that all the magic happens. Positive earnings can have an excellent effect on penny stock companies, because they are suddenly on their way to becoming something more.

If a penny stock is not heavily funded from external sources, or they don’t have a significant cash position, they need positive earnings to stay afloat, fund ongoing operations, and take advantage of their intended strategic options.

Debt
Some companies can get saddled by enormous debt, especially in their start-up or early growth phases. This can be detrimental in many ways, as interest payments can cut into earnings, and creditors can pull strings at inopportune times, effectively sweeping the feet out from under a fragile company. There are also issues of control, and dependence.

Until a company’s revenues out-pace expenses, debt will continue to grow. Unless, of course, the company raises capital through other means such as dilutive penny stock offerings, or by giving up significant control to venture capitalists.
All of the cash, inventories, and property of a company have some value, and can give you a quick glimpse of the health and position of a company. For example, if they have six million in cash, with yearly costs of one million, you could assume that they would be able to meet their operational requirements for a long time.

If they had significant miscellaneous assets, they may be able to sell these off to raise capital if they needed. However, if their assets are well below their liabilities, the company will likely need to find a quick source of financing to meet their obligations.

Liabilities
Here is how much the company owes or needs to pay out. The lower the value the better, especially when compared to assets. There should almost never be higher liabilities than assets. In fact a ratio of 1:2 is standard in some sectors, to give a company some breathing room.

The Bare Bones
Without at least this basic understanding, it is unlikely that you have enough information on the penny stock you are interested in. Sure, its great to jump on board a penny stock with a good story, but if you dig a little deeper you may find that the company actually has a great story, or has some underlying problems that the average investor may not know about.

You May Have Heard…

You may have heard that it is a bad idea to ‘fall in love’ with a penny stock you own. However, something more dangerous, and much more common, we call ‘falling in hate.’ We are referring to holding on to those losing positions as they plummet, whether because you feel “It can’t go any lower,” or because you won’t sell until it goes back up to where you bought it at.

These attitudes are very common, and very dangerous, and 9 times out of 10 work out to the detriment of the investor. For example, if you think it can’t go any lower it very often does. It CAN go lower. Surprise!

Wait until the penny stock is back to where you bought it, and you may be waiting for a long time. As well, this philosophy sometimes makes investors sell at break-even when the penny stock is moving past the buy price and into even higher territory.

Averaging Death – Er… I Mean Averaging Down
Averaging down is when you buy more shares of a penny stock after it has sunk. This makes your average price per share lower. For example, you bought 1000 shares at $2.00, the penny stock sinks to $1.00 and you buy 1000 more. Now you have 2000 shares of penny stock at an average price of $1.50. This can be beneficial as the price only needs to increase 50% now to get back to break even, rather than 100%.

However, be warned. Averaging down is just throwing good money after bad, and very rarely works out to the advantage of the investor. You already expected the penny stock to go up, and it went down. Now you are doubling your position in a penny stock that is not performing as you would like. Your fresh money may be better spent going into an entirely new penny stock altogether, as then you can pick from a pool of thousands, rather than putting more cash into a sinking ship.

Danger – Thin Ice
Well, you might say the penny stock can’t sink forever and eventually it has to rebound. This is the main argument that people use to justify their methodology of buying more shares.

However, there are some factors that you may not have considered which can really hurt a penny stock price without being very visible. For example, often a wounded penny stock will consolodate shares (commonly referred to as a reverse split). All of the sudden the penny stock price doubles but you have half the shares. This gives the underlying penny stock room to continue its decent from a higher platform. Usually after a reverse split shares do decline in value in the short term.

Another problem would be if the company is in real trouble. The shares could keep sinking until $0.00. This is the only ‘guaranteed’ price bottom you’ll ever find, and if anyone tells you different they are not being forthright. In such a case averaging down is a really bad idea.

When Is Averaging Down Effective?
After considering what we have said above, there are exceptions for averaging down. Perhaps the company is solid, with earnings and improving revenues. Maybe the penny stock price has simply been decreasing in sympathy to the overall market, or along with its sector.

If you feel strongly about the company, from an educated rather than emotional standpoint, then averaging down can be effective. That is, of course, if you are right about the company.

Quick Fixes and Professional Tips
You must never ‘fall in love’ with a penny stock, or be emotionally attached. You need to be able to logically examine your holdings with an unforgiving eye. When a penny stock starts going down, or acting differently than you expected have the courage to say “I was wrong,” and cut it lose. The money from that investment could certainly do better for you in an entirely different penny stock. As well, professional traders very rarely take loses of more than 15%. Once the penny stock starts to sink past their maximum loss limit, they sell immediately, no matter how much they like the company.

Don’t sink all of your cash into a penny stock at first. It is often good to buy half or a third of what you can afford, then give the penny stock some time to perform. If the shares increase you’ve made some money. If they sink, you have money held back to average down (as long as the company is strong and is simply being undervalued).

Many professional traders ‘Average Up’ which is buying more shares only if the price begins to rise. The increasing shares prove that they were right to pick the penny stock and gives them confidence in their research methods. If the company is in a long term uptrend they’ll be making plenty of money on the shares, especially since they increased their exposure.

So You’ve Raked It In
Once you’ve had a big success with a penny stock, you may want think logically about cashing out so that you maximize your advantages and benefits.

For example, taking all the money off of the table and buying a house or a boat or getting some dental work done may not always be the best idea, but that’s what you’re doing it all for anyways, isn’t it. On the other hand if you let the money ride in the penny stock, expecting even further gains, the penny stock could come crashing down and wipe out all your profits. In that case, it would have been better to buy the boat…

Asset Proportions
A solid strategy that more experienced investors often use is selling a fraction of their holdings. This is a good approach if you are uncertain that the penny stock will go higher or not. For example, you could sell 1/2 of your holdings and let the other half ride. These proportions are popular once a penny stock has increased 100%, as even a subsequent collapse of the penny stock in question leaves you at least at break even, but you still get to benefit from any further price appreciation.

What if you have found another investment you are interested in? You could leave 1/3 of the original penny stock on the table, take 1/3 of the cash, and put 1/3 into the new investment. The ratios are really dependent on the situation, but the overall concept is a very good methodology, specifically geared towards investment in volatile penny stocks.

Playing With House Money
It may be a good idea to take some time off of trading before putting your gains back into the market. Understandably you may be running on adrenaline or emotion after your profits, and until you are once again emotion-free it is never a good idea to trade. Investing should be a very logical and boring business.

In Vegas there is a concept called ‘playing with house money.’ In short, they have found that gamblers are far more likely to be risky with casino winnings than with the money they walked through the door with. While $1 = $1, a player that wins big early on in the night is likely to be frivolous with that money, and not be as upset once he or she has lost it all.

The exact same concept holds true for penny stock market investing.

If you just made a few thousand off a penny stock, you are more likely to dump it into the next ‘hot thing’ without following the same method that helped you pick that first winning company. This problem can be easily avoided by taking a week or two before putting the capital into another investment, because by then your emotions may have subsided and your logic could have taken over again.

Getting Back In
Cashing out after a big run-up in a penny stock is also a good idea if you have intentions of getting back in later. Often profit takers will push the share price back down, at which point you can sink your cash profits back into the shares at lower prices than you had just sold at.

I Can’t Believe I Didn’t Cash Out!
What’s worse than selling too early? Right, selling too late. Don’t try and pick the exact top of a penny stock. This can only be done by chance, and no professional trader has ever consistently come close to picking trading bottoms or tops. Instead, when you’ve made a good gain from your shares that you are happy with, take your profits off the table. Don’t look back later and regret it if the shares go higher. As soon as you start regretting profits, you’ve got to reassess if you are cut out for this, the greatest game on earth.

Penny stocks represent an excellent investment vehicle for producing gains, while the risks are equally as high. When you finally decide to get involved in penny stocks, to go ‘Beyond The Brink,’ there are some things you need to know.

In fact, whether you have been burned by penny stocks in the past, or have never even invested, the following theories are designed to give you an instant and significant advantage over all those inexperienced and uninformed traders. After all, to make money in penny stocks someone usually has to be losing money. Which side of the fence do you want to fall on?

Glass Jaw
Lots of people have made lots of money from trading penny stocks. Lots of people have lost plenty, as well. What is the difference between a successful micro-cap trader, and one who continually takes it on the chin?

Uses professional penny stock picks and research. Does their own due diligence. Observes patience. Takes lessons from past trades and penny stock activity. Takes lessons from other traders. Decides between 10 penny stocks at a time.

Uses tips at work, rumors, and so-called ‘inside scoops’ to pick penny stocks. Doesn’t investigate financials and corporate position. Falls victim to negative emotions like greed, anger, and desperation. Makes the same mistakes more than once. Looks at one penny stock alone on its own situation.

So Let’s Learn
The fact that you have taken the time to review this feature demonstrates that you have the characteristics of a successful trader, specifically the willingness to learn from experts and the experiences of other traders.

So let’s learn. As mentioned above, you should always examine groups of penny stocks together when looking for a new issue to invest in. For example, make a chart and write down the revenues of each. In the next column list the earnings. Follow this by each of the subsequent criteria you think are important. With all of the data on one table and available at a glance, you can easily get a clear picture of which are the one or two strongest companies from your pool of potential investments.

However, understand that penny stock prices do not necessarily act in concert with the underlying fundamentals of a company. For example, there is nothing saying that the penny stock of the worst company on your list won’t outperform the top ranked one.

For that reason you should also include factors such as trading volatility, your opinion of a potential break-through due to some new product, potential positive press releases, etc… This method is not intended to reveal the best penny stock, but instead to give you additional clarity about which are the best few and worst few according to your own weightings of the various factors you have chosen.

Available Advantages
Get a discount broker. Monitor your portfolio online, do your research online (and offline), and place your trades online. Embrace the technology, because it provides superior advantages all across the board. You can screen penny stocks, put those into comparative charts, instantly access the corporate press releases, check the latest industry news, and then place your trade… all for about $20.

Then you can monitor your trade order fulfillment, verify that the money and shares traded hands, track the progress of the penny stocks, get instant alerts for press releases… It is truly endless and complete, and each step that you take full advantage of leaves other traders one step behind you.

Keep small amounts of money in each penny stock, and only ‘risk’ money for penny stocks. While these low-priced, volatile investments can produce some truly incredible gains, they usually bounce among all sorts of price ranges.

On a related note, if you get ‘freaked out’ or worried about a penny stock you hold, you should consider selling your position. Try to invest in solid penny stock companies that have a low share price because they are small or undiscovered, not because they are having business troubles.

Beyond… And After That
Some of the most successful traders have a few things in common. Firstly, they have made some major trading mistakes in their day. However, they learned more from these mistakes than they ever did from any of their great trades. Don’t squander your failures by trying to put them behind you.

Secondly, keep a journal with dates, specific trade amounts and prices, and even the penny stocks you were thinking of investing in but didn’t. You can use this for a hundred different purposes as you become a more advanced trader, such as seeing opportunities you missed, or learning that your strategies are valid, or just to monitor your improvement as you become more experienced from month to month.