We all know that penny stocks are inherently risky for a number of reasons that will not be disclosed here, because that is not the topic of this guide. However, it has caught my eye that a group of successful investors applies certain strategies to minimize risk and pick up the profit. Not unlike any stock trade, there’s no guarantee and a safe plan, but these points may help you suck more juice from your penny stocks.
1. Position Sizing
A strategy that includes limiting each individual purchase to a pre-set percentage of your portfolio. It works like this, if you have a $25,000 portfolio, you may opt to limit your largest purchase to $1,000, or 4 percent of the portfolio. As one of the most overlooked strategies, position sizing limits your upside, but also protects you from downside in any of investments. It’s totally up to you how much you want to invest in a single trade. It’s not uncommon that investors with larger portfolios may buy more stock at the time, but still keep the purchase to 4 or 5 percent.
2. How Big is your Portfolio?
Still, there are those who like to take a gamble and are willing to risk 20 percent per trade. Whatever you decide, it’s important that you limit the total exposure per trade. However, bear in mind that smaller portfolios are not suitable for position sizing. It seems logical that of you only invest $750, there is no need dividing it into eight penny stocks. Yet, a trader with $300,000 may profit from increasing their buys at $5,000, which in theory leaves them with 60 different stocks and a total risk of $5,000 per investment. If you integrate position-sizing strategies with stop-loss orders, your portfolio is secure.
3. Importance of Diversification
This strategy is based on buying lower amounts of more stocks to shield yourself from the downside of any of them. You can diversify your investments by several standards like industry, company size, share price, region of the world or country, volatility, stock market or parent exchange, type (stocks, bonds, real estate, and so on). While diversification is appropriate for many investors, it won’t help you achieve dramatic gains. More realistically, the more you diversify your investments, the closer your returns will mirror the market average you achieve.
4. Pinpoint Investing
Another related technique is pinpoint investing. It involves buying six or seven penny stocks at most at one time instead of spreading risk around. In this way, the increasing share prices represent more of a percentage gain, but the losses are also more dramatic on a percentage basis. Many people don’t find pinpoint investing appropriate for their particular cases, but you can make fast money if you have good research and have analysis skills.
Finally, if you invest penny stock only on the first-class stock exchanges, you can improve your odds by protecting your investment form unhealthy businesses. The better stock exchanges have stricter reporting polices and higher degree of investor visibility, and consequently more promising penny stocks are drawn to secure stock exchanges.
Dan Radak is a web hosting security professional with ten years of experience. He currently works with a number of companies in the field of online security, closely collaborating with a couple of e-commerce companies. He is also a coauthor on several technology websites.