Are Penny Stock Investments Safe?

Are Penny Stock Investments Safe?

The question arises all the time as to whether penny stock investments are safe. Before answering that question let me clarify that all investing has inherent risk. Yes, you risk losing money whenever you invest. This is true whether you invest in bonds, mutual funds, commodities, blue chip stocks or penny stocks. So the answer to the question is that no for of investing is 100% safe.

So where do penny stock investments fall in the order of safety? No one is trying to be deceptive. Penny stock investments can be risky. However, if you are going to trade in penny stocks then you need to realize that they are not long term holds. I would never recommend buying a penny stock and holding it for five years. The fundamentals of these stocks are so poor that it is difficult to even make an informed decision about the prospects of the company. I would have no idea where they would be in five years. But I may be able to predict their near term trading pattern over the next two weeks.

Penny stock investments are really not investments at all; they are trading vehicles. The point in trade penny stocks is to move in and out of them to take advantage of the large swings that they often present us with.

If you put in place a very disciplined and strict trading program you can limit much of the risk involved in penny stock trading. If you narrow down the stocks that you will trade to those that provide you the best liquidity and near term visibility of price movement you will go a long way to limiting your risk. Trade penny stocks who have had recent good news or who have already reported earnings. This way there is less of a likelihood of a downside surprise.

Once you have narrowed your trading list down then you need to trade on the basis of some very defined entry strategies and exit strategies. Know why you will get into a stock and why you will get out. I do not recommend that you ever make those decisions based on fundamental analysis. You are a trader and should make your trading decisions on the basis of technical analysis.

Determine what triggers will get you into a position and which trading signals will get you out. The same principles of technical analysis apply to all stocks regardless of their price. Become a student of technical analysis and apply what you learn to your trading of penny stock investments.