If you’re considering penny stock trading, I urge you to step back and consider what you’re really getting into here. Despite the hype you may read, this risky and volatile field of stock investing is not a shortcut to riches. It is a real profession requiring knowledge and discipline.
The True Risk
You will be dealing with real money and the real consequence of losing that money. You have to ask yourself if you have the capital to withstand multiple losses until you find a way to find a winner. And despite what you might read online, there are no sure winners, especially in penny stock trading. More likely than not, even the most skilled and experienced traders pick losers more than they pick winners. This follows the Pareto Principle where 20 percent of an experienced trader’s investments make him 80 percent of his money. But until you really know the field, expect your 80 percent losers to out-lose your 20 percent of winners.
Why Discipline and Poise Matter
You will be trading in an area that requires great poise and discipline. I point this out because many people are susceptible to making impulse decisions based on emotional whims. For example, you see a stock suddenly jumping in value… so despite not knowing its history or anything about the company behind it, and despite it not fitting into your predefined strategy, you rush to buy it.
But what happens if you find out it is not a liquid stock, which means it is not easily sold? What happens if it suddenly drops like a rock and you can’t let go of your shares?
On the flip side, if you do your due diligence and you feel confident about a long-term investment in a particular penny stock, then it just sits there for months not making you any money whatsoever, so you dump it. Then two years later the company is all over the news and its share is 100 times its value when you owned it.
Don’t Be Suckered By Hype
But probably the worst emotional impulse to succumb to in penny stock trading is to read some hype — any kind of hype anywhere — and then buy against your strategy and without doing your due diligence. No matter how persuasive the site was, I guarantee you will regret this impulse.
There is an entire industry of trading oriented around exploiting novice investors with hype and misinformation. This is something the SEC (Securities and Exchange Commission) has been battling for decades, and it has only become more challenging to combat with the advent of the Internet.
So as you wade into the penny stock trading waters, make sure you understand that you’re entering a real professional endeavor which requires work and emotional discipline. You can make money with penny stocks, but it is not a shortcut to riches.
