Penny stocks are very similar to standard stocks other than the fact that they are not traded on the main stock exchanges. Penny stocks are, by definition, stocks that are trading at or below five dollars a share. The idea of trading penny stocks is just the same as regular stocks: Try to buy low and then sell higher.

Penny stocks are a lot more volatile than standard stocks and this is both their most important advantage AND their foremost disadvantage. Penny stocks are known to double their value in a single day whereas it could take weeks, months or even years for a regular stock to do that. The truth is it is a lot easier for a stock priced at a penny per share to snowball its worth to two cents a share than it is for a stock worth $30.00 per share to double its price to $60.00 a share.

How all of this impacts the penny stock investor is a good news/bad news kind of thing. Bad news first: Penny stocks can be so volatile that you might lose your full investment in less than a single day. It's not remarkable for a stock worth a penny a share to go to zero quickly. Regular stocks can also go to zero but they will take a much longer time period doing it, offering the investor a chance to cut his or her losses and hold onto a portion of his or her investment capital.

You can rapidly be taken out by penny stocks if you are not paying close attention with your finger ready on the sell trigger. Penny stocks do not habitually perform as you might guess after investigating the books of a company. In the universe of penny stocks, one frequently sees good companies going down and bad companies going up.

The good news? You are able make a sizeable percentage increase fast with only a tiny amount of assets at risk. And, although you can lose the majority or all of your investment capital fast, you will not be damaged that much if you have only risked a small part of your whole net worth. Obviously, risking only a penny and having two pennies the next day is not going to alter your life that much and so you may be tempted to try to double a much more sizeable initial investment. Because of the volatility of penny stocks, you should never put up more than you can afford to lose.

How, then, can you put the odds in your favor? It's all about selecting the perfect penny stock and you may require some assistance there. Use professional stock picks from an honest stock-picking service as a starting place such as Paradigm Capital Management. Make a listing of the ten top penny stocks from the stock picker and then do your own due diligence. List these ten stocks on a spreadsheet and create columns for company earnings, book value and the like.

As said above, penny stocks don't habitually work out as you might guess from the books but most of the time they do, so going through the above exercise is not foolish. Listing the ten stocks on a spreadsheet allows you to see readily which one of them is most likely going to be a winner. After placing your buy order, keep a journal of the real outcomes of all ten stocks, including the ones you decided not to buy. This will be a significant learning exercise for you.

Profit from your past errors. Try to discover what went wrong and why. Don't make the same mistakes again. Watch what other traders are doing and learn from their ups and downs. If the price of a stock is low, plan to discover if it is because it hasn't yet been noticed or if, instead, the corporation is in financial difficulty. Buy the former, never the latter.

When you have a huge win of 100% or more, it's time to get rid of all or a portion of your holding in that penny stock. There are a few ways to resolve this. You could sell 50% of your shares and let the other half ride or, as an alternative, you would leave one third in, sell one third for cash in your pocket and invest the dollar amount of the final third in another, different penny stock. Don't get greedy and keep a stock past its time. What goes up must come down and penny stocks usually do that without warning.

If the stock keeps ascending after you have sold it, don't fret. There will be another train leaving the station in five minutes. The main idea is to buy under-valued stocks and then get rid of them in advance of becoming over-valued. Never buy or get rid of penny stocks for emotional reasons. Habitually go by the numbers and follow your plan.

Finally, beware of hot penny stock tips from promoters. Promoters buy a penny stock and then attempt to prevail on everyone else in the world to acquire the same penny stock, thus driving the value up. Since they made their acquisition before you, they will make a one hundred percent gain or more before you do and will then dump the stock like a hot potato creating a rapid and unexpected descent in share price at your expense.

For more details consult with Paradigm Capital Management
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