5 habits you should follow while trading in penny stocks

HIGHLIGHTS

• Many people look forward to investing in penny stocks, irrespective of the risks
• You should remain a quick decision maker when it comes to buy or sell
• A person should never try to replicate others’ success in stock markets
• A periodic check of the portfolio can provide a better sense of judgement 

Investment in penny stocks often puts you at relatively high risk as compared to the other large-cap and mid-cap stocks as the underlying companies behind the penny stocks or the so-called low-market capitalisation shares often tend to hide the critical information that can drive the share prices in downward direction.

Irrespective of all the risk and complexities involved with penny stock investment, a large section of people still look forward to putting the money in these shares, in a desperate attempt to recognise quick capital gains in a shorter period of time.

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There are many advisory firms and broking agencies that handhold several new-age investors, as well as traders to invest in penny stocks in order to make quick money out of it. But they typically supersede the essential details that can provide a better outlook for the company, which it seems to be the most important factor.

There are several types of investors, for instance, the individuals who invest with a definitive long-term goal, the investors who lookout for opportunities through which they can make easy monty in a year or two, some look forward to passive income from the stock market investments, a few people invest in most dynamic assets including the derivatives products, while some opt for lightning gains through active trading.

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All the people who have invested in penny stocks, or are looking ahead to take sizable positions in low market capitalisation companies, we take a look at five major habits that you should follow while trading in penny stocks. 

1.      Decide quickly

You should remain a quick decision maker, at least throughout your investment in penny stocks as these equity assets remain highly volatile in nature and you may witness wild appreciations, as well as corrections in a day’s session. The ability to quickly decide whether to hold the stock, buy the stock, sell the stock or avoid it completely should come immediately, especially when you have to decide between a buy and a sell.

There can be times when you may see sharp appreciation, day-after-day, or week-after-week, in such cases you should be aware of the expected potential of the company and estimated return it can provide. It could be better if you satisfy your instinct with a nominal return of say 20% to 30%. On the other hand, the decision on selling should also be done quickly in order to contain losses if the shares are on a falling trend. 

2.      Don’t replicate other’s success

You will definitely hear a plethora of success stories of many individuals who have made fortunes out of penny stock investment. First of all, you have only heard about such instances, very few individuals showcase a documented proof of their so-called massive earnings. Therefore, you should never try to replicate others’ success and pick your own investment options with your own fine sense of analysis. For that matter, you can consult a professional expert.

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3.      Don’t stretch beyond capacity

Taking risks is not bad at all, and taking calculated risks is somewhat advisable when it comes to stock markets. But, you shouldn’t take risks that are beyond your capacity or the ones for which you don’t have any contingency plans. Irrespective of how lucrative the opportunity may sound, you shouldn’t cross your limits of arranging money on high interests, investing the resources that are kept aside for meeting periodic requirements etc. 

4.      Avoid short selling

Estimating the share price action is the one and only thing on which the investing principle works. Everyone, including a power-packed investment manager, a well-established advisory firm, a day trader, a long-term investor, a qualified institutional buyer or a broking and research organisation, are involved in gauging the factors that can move the share price in either direction.

As a result of a series of technical and fundamental analysis, an indicative market price is suggested. On the contrary, penny stocks are altogether different as they don’t follow technical or fundamental principles as most of such assets are driven by a smaller number of people as compared to the conventional blue-chip shares and even the mid-cap stocks.

Therefore, you shouldn’t fall into the practice of short selling penny stocks, because you never know the price action of the day. At least you should short sell a huge number of shares, the quantum of translation should remain well under your risk-taking abilities, if you are not willing to lose big money. 

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5.      Check regularly

Penny stocks certainly require a regular intervention as they often experience high tides, and most of the times, you will not come to know the reason behind, possibly due to lower number of market participants holding the asset. A periodic check of the portfolio can provide a better sense of judgement so that you can act accordingly before realising heavy losses.