If there’s one thing that keeps wannabe penny stock traders from actually investing their money in the market, it’s the fact that the penny stock market is risky and has a reputation for manipulation in contrast to higher priced stocks.
While it is true that penny stocks can be a risky investment, it’s also true that there are steps you can take to mitigate those risks, and that’s what we’re going to talk about today.
Here are the top three tips for trading penny stocks safely:
1 – Stick With A High Quality Exchange
Fundamentally, higher quality exchanges are manipulated to a much lesser degree than low quality exchanges. What is a high quality exchange? In simple terms, it’s any exchange with a good reputation. Examples include the major exchanges such as the NYSE or the NASDAQ.
Either of these exchanges are extremely well known and have a specific sub-exchange for trading stocks that buy and sell for less than $5. For a first time investor, you would be wise to stick with a larger and more reputable exchange over a smaller one.
2 – Set A Stop Loss
A stop loss is designed to minimize losses when a stock sees a sudden drop in value. Professional penny stock traders will set a stop loss with each trade they make, and you should too.
How a stop loss works is you set a specific price point when your money will be automatically pulled out of a trade. Let’s say you invest in a penny stock at $0.5 with an expectation that it will reach $0.6. However, you set a stop loss at $0.45 just in case the stock drops.
If the stock does indeed drop to the $0.45 mark, the stop loss would return your remaining funds to you. While this does mean you would have taken a loss, it’s a smaller loss than you might of otherwise had to endure.
3 – Only Invest What You Can Afford To Lose
This is perhaps the most commonly given piece of advice in penny stock trading, but it’s still worth repeating: never invest money you cannot afford to lose.
In fact, to be really wise you shouldn’t invest money that you aren’t willing to lose either even if you can afford it. Instead, choose the maximum amount of money that you are willing to play around with and trade with the possibility that you could lose it all.
Even if that’s only $50 to $100, that’s more than enough to trade with in the penny stock market and make gains.
Trading Penny Stocks Safely
While you should trade penny stocks at your own risk, you also shouldn’t be deterred from doing so just because you think it’s too risky. As with anything else, learning how to trade penny stocks is an ongoing process and your skills will be developed over time.
As a final word of advice, you can start with making imaginary or paper investments over the course of a week or so, and then once you begin making consistent profits with your ‘imaginary money,’ you can start to make real investments that you are comfortable with.