"Collect 'em all, and win!" You've heard that line before. Are you the type that picks up pennies off the pavement? Most folks these days are likely to do just that - even if they're too bashful to admit it. Some folks say a penny doesn't go a long way, but your online broker just might disagree with you. If you put enough of 'em together, you can definitely ring the bell and win a prize.

What I'm talkin' about here is online stock trading, winning the big prize through the humble penny. Investing in penny stocks gives folks the opportunity to dramatically increase their profits in online trading. However, any form of stock trading also provides an equal opportunity for you to lose your trading capital (uh... read as "shirt") quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles in stock trading. If you doubt my word, just ask your online broker. You can find a good one with the folks over at Firstrade. These guys are real pros. What I like about 'em is you can get live support at http://www.firstrade.com/public/en_us/support/livechat before you even join. (You know me and that word "free" - we go together like hand in glove.) If you're new to online trading, you just gotta love these guys. And in case you were wondering, penny stock orders are also accepted, unlike some houses. Okay, here we go with my 5 tips...

1. Penny Stocks Are A Penny For A Reason

While we all have fond dreams of investing in the next Microsoft or maybe Home Depot, the truth is, the odds of you finding that once in a decade stock trading success story are slim. Companies traded as penny stocks are either just starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify an investment banker's money for an IPO. This doesn't make them a bad investment, but it should inspire you to be realistic about the kind of company that you are investing your hard earned cash in.

2. Trading Volumes

If you're thinking about investing in penny stocks, look for a consistent high volume of shares being traded. I'll say it til I'm blue in the face: do your due dilligence, and any stock broker worth his salt will agree with me. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn't trade for the rest of the week, the daily average will appear to be 200,000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it one insider selling or buying? Liquidity should be the first thing that you take a look at. If there is no volume, you will end up holding "dead money," where the only way of selling shares is to dump the bid, which will put more selling pressure, resulting in an even lower sell price.

3. Does the Company Know How To Make A Profit?

While it ain't unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to hunt up more financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company? The opporunities for compromise abound - again, when in doubt, check with your online broker.(Again, the folks at Firstrade can help you out with this at www.Firstrade.com. If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have An Entry & Exit Plan - and Stick To It

Penny stocks are volitile. They quickly move up, and move down just as fast. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10,000, a 20% loss is a $2000 loss. Do this 5 times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.  If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential. You can get more gems like this for free from the FAQ at Firstrade.

5. How Did You Find Out About the Stock?

Most folks find out about penny stocks through a mailing list, stock promoter or a broker. There are many excellent penny stock newsletters, however, there are just as many that are "pumping and dumping," if you know what I mean, and I think you do. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here. Not all newsletters are bad. I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.  How to spot the good companies from the bad? Simply subscribe, and track the investments. 

A Penny For Your Thoughts

One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. As I said, any form of stock trading is risky business - no relation to the Tom Cruise movie, of course. You are investing to make money and preserve capital so you can live like a fat cat, even if you're on a money diet. The object is to make money. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you'll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, so if you choose to enter the fray, play it safe. Ask the folks at Firstrade at www.Firstrade.com what they think about penny stocks. Oh, and uh, tell 'em Jack sent you. ...Yeah, like that.

For more tips on manging your money, check out SectorMatic Money Site. With literally THOUSANDS OF ARTICLES and A WORLD OF PRODUCTS, your chances for genuine happiness are rapidly approaching the infinite. Hey, we aim to please. SectorMatic - it's for you!

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Until next time,
Jack Schmidt
Spokesman

SectorMatic Money Site
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