When you're considering investing, one of the biggest pieces of advice anyone will have for you is to buy and hold. For a long time. Eventually you'd hope that the market of a big name stock name would out-beat the overall market, out-beat inflation, and make you money over the long haul. That's what you'd hope. However with so many companies reeling and so many other names going under, figuring out what you need to do can be shocking.
If you're not interested in risking your primary savings in the stock market, you can get involved in the penny stock market. Penny stocks (Pinksheets, OTC, etc) allow you to put a lot more shares on the line with a lot less capital at stake. Penny stocks also allow you to invest in a wide variety of burgeoning names. I have ridden the roller coaster of penny stock investing for several years, and I wish I'd have listened to my own advice and known then what I know now.
I've boiled it down to three rules you should follow when investing in penny stocks.
Don't Invest What You Can't Afford to Lose:
This is one of the primary rules in investing but you always need to be clear about what you're willing to lose, especially with penny stocks. If you have bought in near a peak and your value begins falling, often you can't even find a buyer of your now worthless stock. If this happens and your stock's value falls, you need to be prepared to hang onto it until you can make your money back. You also can sell towards the end of the year and use the losses to write-off or off-set gains. If you're counting on movement in one direction or another, the value of penny stocks is even more fickle than regular stocks. Don't bet the rent money on a penny stock.
Don't Make Trades That Won't Make You Money:
Penny stocks are a fickle bunch and even if you're buying a lot of shares that means someone else is selling their shares. Rather than seeing a stock that's trading at say, half a penny, and buying at those levels only, it's a much better idea to buy your first shares, say 10,000 shares, and then wait. If your value goes up, from one half penny to a full penny, that's great news! That means you can sell half of your shares and keep the rest. However if your stock goes from half a penny to two-tenths of a penny, that's a good time to track its movement. If you believe in the company and trading continues bouncing around those levels, buy a little more at two tenths of a cent. It may seem counterintuitive, but if you've done your research and you believe in the company or product, then the movement you could be buying into could just be "growing pains." Averaging down is also much better than averaging up or buying more on the way up only to have the air come out of the stock.
Don't Get Greedy:
One of the biggest problems with penny stocks and the like is that you often don't know what the news is until it's too late. If you've bought 100,000 shares of a stock at $.008 and next thing you know that stock is at $.04, do yourself a favor and take half (or at least a third) off the table. Yes, you are missing out on the potential upside, but when this stock goes to eight cents on no news and then drops like a stone for two years, at least you'll have gotten back your initial investment. If you get too greedy and you don't have a plan for when to get out, you're likely to ride the roller coaster all the way up and back to the beginning.
Investing in penny stocks is much more speculative than investing in more predictable blue chip stocks, though if the last few years have taught us anything it's that even the strongest of blue chips can be nothing but smoke and mirrors. If you're going to get into penny stock investing, be prepared to move on even the slightest movements, don't invest what you can't afford to lose, and make sure you've got some time to do your research. If you are able to hold a stock of a company you believe in for several years, you could just be buying into the next Microsoft.
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