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Increasing Your Chances of Success When Buying Penny Stocks

Is it possible to make a bundle of money with small caps? Without a doubt. Then again, you may also lose a small fortune trading penny stocks if you are not very careful. There's a lot more to making money with penny stocks than placing a buy order as soon as your preferred newsletter suggests buy. Below are a few considerations to look out for.

Volume

Most small cap stocks often have simply too much volume, or not really enough. The higher the daily volume, the smaller the range and the harder it is to move the stock significantly. On the other hand, when the average daily volume is small, you'll have a hard time getting filled. According to VectorVest, of the 1622 stocks they monitor which have been listed on the Pink Sheets or OTC BB and where the market cap is less than $1 billion, the average volume is only 296 748 shares per day.

Any time you took a position size of $5000, you would need 50 000 shares. Based on the average daily volume listed above, it is not a problem. Having said that, as with any averages, it's important to investigate a little closer. When we filter the list by stocks that trade under 50 000 shares a day, we find that just 19% of stocks are still left. Only 12% of small caps trade with volume in excess of 100 000.

Lets look at it in another way - average $$ volume. This factors in how much your $5000 can acquire. If the hot small cap stock is trading at $1, you'll need an average of at least 5000 shares trades per day to have some liquidity. If this trades for $0.10, then you will want 50 000 shares exchanged daily. For a $0.01, you may need 500 000 shares per day.

When we look for stocks who trade more than $5000 average dollar volume per day, we are left with 419 left. If we want twice the liquidity, merely 332 stocks can offer us an average of in excess of $10 000 average dollar volume every day.

That will surely filter out the majority of tradeable stocks.

Greed

Chances of earning money buying and selling small cap stocks is undeniably against a person. The majority of people that buy penny stocks are motivated by greed : the hopes of finding and catching the big winners and making a killing. From the 357 stocks that started out the calendar year with at least $10 thousand average price volume, 125 have been profitable, 228 ended up unprofitable. The average return on investment was -7.86% YTD this year opposed to an ROI of 5.33% for the S&P 500.

Don't expect you'll generate a bundle. Having said that, to put the odds on your side, think about the following:

Exits - Stick to an exit plan. Any time these stocks decline, they drop rapidly. If the trade is headed against you, exit.
Market Timing - Should the common market is going lower, do not buy and sell small cap stocks.
Growth Rates - Look for securities in which the growth rate is constantly on the move at a clip that is at least 15%. Likewise, seek out meaningful rise in earnings per share of at least 15%.
Don't Trade With Money You Cannot Afford To Lose - If you cannot afford to drop $500, please don't invest in penny stocks. Since you can get away with purchasing a few shares of a blue cap in time, you will have to maintain losses trading small caps.

The chances of earning money buying and selling small cap stocks are against you. Even so, a very good trader understands how to remove the losers before he's even obtained the stock. Before you think about the next hot penny stock, do your homework first. If your firm keeps growing, is profitable and has volume, you increase your odds of success.

Checklist: increase in average volume of the previous 20 days must increse at least 100%, have EPS growth > 15%, rate of growth > 15% and will have to hit a fresh twenty six week high. This Year YTD, its returned 26%.

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