FIVE GOLDEN RULES FOR INVESTING IN PENNY STOCKS

SPEND ANY TIME AROUND BLUE-BLOODED WALL STREET TYPES AND I GUARANTEE YOU THIS: THEY’LL NEVER SHARE A HOT TIP ON A “PENNY STOCK” – A STOCK TRADING FOR UNDER $5.

Why not? Well, consider the reasons from these high-level investors…Mutual Fund Managers: They’re prohibited from investing in stocks with such tiny prices. So they don’t even bother researching them.

Hedge Fund Managers: These high-flyers are simply too rich to own penny stocks. With billions in capital to throw around, they can’t buy and sell penny stocks without radically influencing market prices.

Sell-Side Analysts: They shun penny stocks, too. Even if they wrote an overhyped research report, there’s just not enough investment banking business available to make it worth their time.

3FIVE GOLDEN RULES FOR INVESTING IN PENNY STOCKS

But in case you think I just cherry-picked a winning penny stock example, let me warn you – penny stocks can tank just as easily, too. Just because a stock is cheap doesn’t mean the only way is up. It could get even cheaper.

With that in mind, you might think that it’s not worth investing in penny stocks.

Wrong! There’s a fortune up for grabs. But if you don’t want to get burned, it’s critical that you go about it in the right way. Here’s how…

THE PROOF IS IN THE PROFITS…If you’re skeptical about investing in penny stocks, consider ION

Geophysical (IO): which provides seismic imaging for the oil and gas industry.

I first recommended the stock to my WSD Insider subscribers at a bargain-basement price of $4 per share – when Wall Street wouldn’t dare pay it any attention. But we cashed out with profits of 151%.

A gain like this makes penny stocks worth a closer look.

But in case you think I just cherry-picked a winning penny stock example, let me warn you – penny stocks can tank just as easily, too. Just because a stock is cheap doesn’t mean the only way is up. It could get even cheaper.

That’s exactly why I recommend that you adhere to the following five rules when investing in such a speculative corner of the market…

FIVE RULES FOR TRADING PENNY STOCKS

RULE #1 Focus on Fundamentals: A cheap stock price is no reason to abandon sound financial analysis. In fact, it’s even more important that you conduct proper due diligence. Be picky when investing in penny stocks. Insist on buying companies with solid and improving fundamentals. That means looking for strong sales, profits, cash flow, margins and return on equity, with manageable debt.

4FIVE GOLDEN RULES FOR INVESTING IN PENNY STOCKS

RULE #2 Limit Your Investments to $1,000 or Less: By making small bets on penny stocks, you can limit your downside risk and rest easier, knowing that a total loss won’t torpedo your entire portfolio. If you want to wager slightly more, that’s up to you. But don’t wager too much, or else you’ll undermine any efforts to reduce your risk.

RULE #3 Cut Your Losers Quickly: When it comes to penny stocks, “buy and hope” is not an investment strategy. We’re after fast gains. So don’t expect to hold any penny stocks for more than three to six months, unless prices are heading steadily higher. Either these companies pay off quickly, or they don’t. If it’s the latter, sell and move on to a better opportunity.

RULE #4 Use Limit Orders: Most penny stocks sport lower-than-average trading volumes. If we use market orders, we’ll end up paying more, which ultimately cuts into our profit potential. Instead, use limit orders to buy penny stocks. And be patient. Penny stocks are notoriously volatile, which means you should never have to chase prices. Eventually a dip in prices will materialize.

RULE #5 There’s No Crying in Baseball: When investing in such a speculative area of the market, you’re bound to invest in a few duds from time to time. So expect it. As long as you’re keeping your purchases small and not investing more than you can afford to lose, there’s no reason to shed a tear.

In the end, if you follow these five rules, your winners should far outshine your losers – making hunting profits in penny stocks a worthwhile endeavor, indeed.

Ahead of the tape,

Louis BaseneseChief Investment Strategist, Wall Street Daily

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