Penny Stock Tips For Reducing the Risks of Investing

By Jitesh Arora

Penny stock investing is not that easy. It is not meant for those who have patience to take the slow growth route. In fact, with Penny stock investing either you make a great deal or lose very fast. Though it dramatically increases your profits, equal chances are there to lose your trading capital quickly. Within a short duration of a few hours, stocks can rocket 1,000% and then you can watch everything going down the drain, including your initial investment. Hence Stocks can turn out to be a treacherous quagmire for inexperienced investors. Penny stock tips help you to reduce the risks involved to maximize your profits.

Penny stock describes a particular segment of the securities market. Mostly, these stocks are low-priced securities (less than $5 per share) issued by small companies. The stocks are introduced into the market through an Initial Public Offering (IPO). All available stocks have two prices - one price that it can be bought at and another that it can be sold at, the bid price or ask price. The difference between these two prices is known as spread. The spread shows a built-in loss for most of investors, at the time of investment. There are many people who invest in penny stocks believing that 'trading at 10 cents' means that they can buy and sell at 10 cents. This is not true all the time. It should be remembered that the spreads of penny stocks are most probably 26-33%, are often 51-100% and may be even higher. Also there are few stocks that trade within very small spreads. But always there are exceptions to all these rules.

Another factor important among the Penny stock tips is that when evaluating their price information, there are two 'bid' and 'ask' prices - the inside and outside bid and ask. The general rule applied here is that the price you are interested in will be counted as outside bid and ask or the lower bid and the higher ask, as those are the bid and ask prices to customers.

You should be realistic about the kind of company that you are investing in. Looking at the average volume can be misleading and hence you should aim for a consistent high volume of shares being traded. Consistent volume is needed to get in and out at an acceptable rate of return. Also you should find whether the company knows how to make a profit. Pay attention to factors like why they are losing money, whether it is manageable or they have to look for further financing which may result in dilution of your shares. If the company knows how to make profit, they will definitely develop their business, resulting in enhancing shareholder value.

It has been seen that most people find about stocks though a mailing list. While there are many excellent stock newsletters, you should keep in mind that there are many who are pumping and dumping. Hence you have to be careful to spot the good companies from the bad. By subscribing and tracking the investments you will come to know whether there is legitimate opportunity to make money. There are various websites which offer trading strategies and Penny stock tips which can be extremely beneficial for you.

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