How to Buy Penny Stocks Without Losing Your Shirt

buying penny stocks and not losing your shirt

Investing in penny stocks is not as easy as it sounds. After all, there are plenty of stocks out there that trade under a dollar.

Namely, because they have been sold off by bearish investors.

So how can you buy penny stocks without losing your shirt?

Well, for starters, there are no guarantees when you buy any kind of stock. So tips for investing in penny stocks are similar to other investments in that these are just tips — and not a guarantee of success.

That said, if you understand the risks, you can find out how to buy penny stocks without taking on unneeded risk.

Here’s how you start:

Understanding the Risks of penny stocks

Penny stocks are commonly called “penny stocks” because they can trade for only a few pennies — or even less than a penny — per share.

But penny stock investing can cost you a bundle even if share prices are low.

In fact, it’s so common for people to lose big in penny stocks that the U.S. Securities and Exchange Commission has a host of resources and publications to ensure investors know what they are getting into. One such SEC webpage on penny stock rules warns:

“Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Moreover, because it may be difficult to find quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price. For these, and other reasons, penny stocks are generally considered speculative investments. Consequently, investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).”

Any investors looking into how to buy penny stocks or penny stocks should keep the words of the SEC in mind at all times.

How to Buy penny stocks: Research is Key

So how do you mitigate your risk in such an environment, should you decide to buy penny stocks or penny stocks?

It all starts with reading.

Every investor must do his or her own research and look seriously at penny stocks before simply buying in based on a narrative of once-in-a-lifetime opportunities. Because if you’re buying simply because of share price alone — or because of an overhyped recommendation you read somewhere — you’re not getting the whole story.

Take the example I wrote about last month in my article; Penny Stocks — How to Profit Without Getting Scammed.

The Great Idea Corp incorporated in 2011 that has one of the most absurd prospectuses I have ever read.

Here’s an excerpt:

“The Company was formed by Nishon Petrossian, the initial director, for the purpose of creating a corporation which could be used to consummate a merger or acquisition. Mr. Petrossian serves as President, Secretary, Treasurer and Director. Mr. Petrossian determined next to proceed with filing a Form S-1. Mr. Petrossian has no specific experience, qualification, attributes or skills to perform as a director of a blank check company nor in the acquisition of acquisition candidates.”

Got that? A guy with zero experience or skill wants to raise money to acquire another company … nice dream!

Thankfully, Great Idea Corp is no longer out there — because, as should be evident, it was a penny stock doomed to go to zero. But it’s highly instructive that a company like that filed with the SEC at all.

All you have to do is look at regulatory documents and financials to get a good sense of penny stocks that are legit and others that are destined to go to zero. If you choose not to do this reading then you run the risk of big losses.

How to Buy penny stocks: Use Stop Losses and Limit Orders

If you understand the risks but have found a stock that stands up to scrutiny after research, there’s still one last thing to do before investing: set your price targets for both entry and exit.

You see, many penny stocks are thinly traded. That means there is not a very liquid market for buyers and sellers, and simply by placing your order for this stock you could seriously affect pricing.

Think of it this way: If there is only one Tickle Me Elmo left in the state of New York and 100 parents want to buy that toy for their kids … well, the lack of sellers and glut of buyers means the lucky Elmo owner can charge $100 or even $1,000 for this cheap toy.

It’s the same way with stocks. If there aren’t many people selling XYZ Corp. today but you show up with an order to buy 1,000 shares … well, you’re going to have to pay a massive premium to entice people to sell.

Thus, it’s crucial not to place a market order or else you could wind up paying much more than you planned. Instead, use what’s called a “limit order” where you will only buy shares if they trade below a certain price. Sometimes, this may mean buying in smaller lots — 100 shares here, 100 shares there — instead of placing a block order to buy.

Same for selling. You can use limit orders to execute a sale and protect your pricing. After all, the last thing you want to do is flood the market with shares and force the price down because of a lack of buyers.

And last but not least, consider stop losses to protect yourself — even if they are only “mental stops” and don’t automatically trigger a sale. penny stocks are notoriously volatile, and sometimes it’s better to get stopped out for a 10% loss than to hang on as the stock goes lower and lower.

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