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Do's and Dont's

Important Do's and Dont's of Penny Stock Trading

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Speculative trading is, at its heart, something of a gamble against the odds. While all investments are a trade off between security and potential profit, speculative trading is more explicitly tilted towards the potential profit side of that equation.



As a result, speculation should only be a small part of a total portfolio, with the majority of an investor's wealth being spread across a number of safer but less profitable investments.

There are several do's and don'ts for investing in a speculative market that should help make it a safer, more profitable venture for investors.The first and most important 'do' is simple: only invest money you can afford to lose. This is a commonly repeated mantra in speculative investing but one that can't be stressed enough. Speculative investing, especially in microcap or penny stock markets, can be risky so it's never worth it to jeopardize necessary capital by chasing profits. Just like you'd never gamble with your grocery money, you should make sure that the money going into a speculative venture isn't vital to your lifestyle. Speculative investments are designed to exploit a risky situation for potentially high profits, not as a way to support oneself.

Another important do relates to researching. While there are many sources for information on investments, from alerts to newsletters, you should always back this up with your own research. It will help you understand what you're buying, the risks involved and account for potential mistakes or miscommunication between you and your other data sources. Reputable references will be secure enough in their research to welcome additional checking of the data.

When speculating on a company to purchase shares in, it is wiser to invest in a fresh company than one that is trying to fix itself. In general, it's easier to make a new company work than fix a failing one. You can check the previous prices for a company; if that company used to be traded above penny stock prices but has fallen off the exchanges this can be a good indicator that the investment is a poor one. New companies in developing markets tend to be better investments, more likely to pay off with profits and less likely to collapse. Additionally, companies whose prices have fallen are less likely to rise to a profitable level because much of their stock is being held by people who purchased it at a more expensive price and are waiting for any excuse to unload this stock and depress the price again.

Another excellent way to assure yourself that an investment is sound is to examine the other shareholders. Finding this information may be difficult but it can be rewarding, especially if the other shareholders are brokerages or hedge/mutual funds. These kinds of investors are generally accurate about their investments, so finding them involved in an investment is a real sign of potential profitability.

Doing research doesn't stop at shareholders or stock prices. One of the best things you can do when studying an investment is to look at their on-line presence. Companies, especially younger, more dynamic ones, are extremely concerned with their Internet presence and will produce large amounts of information that can be useful in researching the company, its employees and the situation surrounding it. Look for discussions on message boards, a social media presence, or Twitter feeds for employees to get a sense of the company's direction and health.

Another excellent area to research is the company's place in the economic food chain. Even if information on the company itself is scarce, determining its position in the industry can be extremely useful in determining the prudence of investing in it. The more you learn about a company's particular field, the better you can anticipate its performance as an investment and better your chances at turning your speculation into profit.



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November 25, 2014     9:33 PM ET