Stocks Performing Badly

Stocks Performing Badly

Investing in Penny Stocks

When investing in penny stocks there is a lot of money to be made. With such volatile changes in stock price there is plenty of opportunity for overnight profits. Unfortunately, the volatility means there is also strong potential for a fast drop in profits. In this article we will discuss the strongest defence against a downward trending penny stock.

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Before investing in penny shares, the most important decision you need to make is how much money you are prepared to lose. Now, this isn’t like gambling. Usually, when people gamble, the amount they are prepared to lose is the total amount they gamble. In investing it’s different. We decide how much we are prepared to lose, but we may invest a whole lot more than that.

The amount you are prepared to lose is called your “stop-loss” factor. The idea is that you do not want all of your investment funds to run out simply by investing in one stock that performs badly. So, we choose a stop-loss factor that is a percentage of the total we are going to invest in any one stock.

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Let’s imagine that you choose to invest $1,000 in a 10 cents per share mining company. When you invest the money you should have already decided how much of a drop in the 10 cents per share you are prepared to accept before you jump ship.

The stock price will probably begin to climb, especially if you have a good source of stock picks. But sometimes, due to unforeseen changes in the market, the price can suddenly drop. When the price drops we don’t need to be concerned until it goes under the price you purchased at (in our example that is 10 cents).

A good stop loss factor for this example would be around 8 cents per share. Once the value drops to this amount, it is time to get out. It’s possible that the price will rise again, but unless you have good information, it is better to be safe than sorry.