Penny Stocks II – How Does One Strategise?

While penny stock investing has been likened by various by various segments of the investing public to be akin to gambling, where for every winner there are many other losers. At the onset however, if you do your homework and research, buying penny stocks can and ultimately, will be a source of investment income. Gambling is much for suited for those who blindly follow and blindly buy stocks without accomplishing any due diligence.

With the previous article , you would have encountered two main rules for investing in penny stocks. let me take you through the rest of the rules that I think you should know of before you begin investing in penny stocks.

Rule 3: Hitting “Exit” Just Before The Climax – Are You Serious?
If you are invested in a property development company, you do not sell as they begin construction in a new geographical region whilst promising decent growth there. Isn’t that why you are invested in it to begin with? To “grow” your capital? Countless people do this. They buy a stock that looks attractive and they get impatient and sell as the company embarks on an expansion programme. Pardon my demeanor, but why else would you have purchased that stock to begin with?

Right, so the company has to set aside some cash to invest in this expansion and thus will not be issuing any dividend this year (I have my eye on STX OSV on this one). But that is not nearly enough of a reason to hit exit (STX OSV is actually in the midst of constructing of its new Brazilian shipyard).

Basically, if you sell whilst the company is embarking on a growth strategy, chances are, you will be buying back in during the execution stages at higher prices.

Rule 4: Ignoring The Loud Hailers
Ignore the “noise” and stick to the fundamental principles that led you to buy the stock in the first place!

Nowhere is “noise” more prevalent than on internet chat boards. 95 percent of the people who post there simply “follow the leader” and know nothing of what they speak. Of those 95 percent, i dare say, 90 percent of them do not even know why they bought the stock to begin with.

Screen capture of an internet chat forum

Rule 5: Buying After A Significant Event? – NO!
If say you are interested in an initial public offering (IPO), would you try to buy in on the first day? If you did, I am pretty sure you would end up with the crying baby at the end of the day, especially if the said IPO went by the name of Facebook.

So, it applies to penny stock investing and indeed, investing in stocks on a general basis. A development that has been announced should not warrant you dipping into your kitty to splurge a counter that has already priced in the development. You are already too late! So its only right for you to accept that fact and wait for the price to reach an acceptable entry level.

A possible caveat of this rule is when the stock breaks out of its historical highs due to a confirmation of a massive discovery of gold or oil as is the case with Ramba Energy.

Rule 6: Re-Evaluate On A Regular Basis
The need for re-evaluating your positions in penny stocks on a regular basis cannot be emphasised more. This is especially true if developments that impact the underlying fundamentals that led you to buy the stock in the first place, occur.

This could mean selling the stock and quite possibly taking a hit.

Penny Stocks – Not A Lost Cause
I read a comment left over by a Facebook user of our sister publication, Shares Investment .

The comment espouses that penny stocks have a higher tendency of eroding capital more so than blue chip stocks. I do not agree with this pronouncement and wrote back with my counter argument.

At the end of the day, I want you, the reader, to understand that penny stocks are not a lost cause. They are however quite risky investments that are not suitable for all investors. That said, penny stocks does offer an attractive promise to investors who do their homework.

By homework, I mean extensive fundamental research on the company as well as certain other tips that you can look into. We shall take a peek into selecting penny stocks next week!