Biz & Co

15 Penny Stock Trading Myths

If you have been around the penny stock trading for a long time, you should be sick and tired of hearing the same lies that get peddled every time. Even if you are long past the stage of falling prey to these myths, they still have enough prospects to discourage beginners from getting super active with trading- or it sends them down the wrong path that guarantees waste of time and money.

Daily, millions of searches are being made on Google for “Penny stock”. Some of the results are success stories of trading in penny stocks, while other results are riddled with lies about why penny stocks do not work. It is worthy to note that both groups of results are filled with bad myths.

Do not fall a victim to these myths. For new traders, this post will also serve as a “Beginners Guide to Trading Penny Stocks”. Learn the basic truth about penny stock trading by reviewing the following fifteen myths that you may have been told:

1. It requires a lot of money tostart with

Penny stock trading is different from another trading like blue chips where you need a lot of money tostart trading. If a company shares trade at $130 and you want to get a valuablespot in it, you may need hundreds or even thousands of dollars to get commence trading.

In penny stocks trading, you don’t need a lot of money to get started. Say the stocks you are shorting or buying trades for a small amount of dollars per share; thenthe only thing required isalittle brokerage account. For example, you have got $900 to invest; you can go on to buy more shares of below $1 per share company than another companythat has prices of shares higher than $100.

All you really need to trade in penny stocks are to own a brokerage account containing a few hundred dollars, a computer with connected to the internet, and time.

2. You are required to learn everything about trading

Maybe you have never traded in stocks before, getting started with penny stocks may seem overwhelming, but the truth is that you don’t need to know everything about trading before you start making profits.

All you need to do is know all the various tactics available on a basic level. Study the mechanism of each tactic, but pick the one that you feel will work for you. Employ the only tactic you feel right about- and have enough cash on hand to use in trying to master another strategy.

3. Your goal to aim for should be an annual profit of 15-30%

Mutual fund or hedge fund managers would tell you that earning 15-30% profit a year is a good goal. Of course, it is a good goal- that is if your portfolio is worth millions of dollar. But not when you are dealing with penny stocks, it is just not enough.

The problem with that 15-30% goal is that if you have a few thousands of dollars in your account and make no further contribution, it will certainly take a lot of years before you become a millionaire and recession or inflation may not even make it worthy in the end.

You may be the oldest man in the world before your tiny account turns into a million dollar if you invest in the traditional stock market. If you are starting with a small account, you need bigger wins.

4. You need to have a diversified portfolio

Traditional money managers will tell you that you need to diversify your portfolio. This is another big lie. Diversification mean having different positions thereby acquiring more risks. This wisdom used in building stable investments cannot be applied to penny stocks because both are set up differently.

The volatility of penny stocks is high so much that good positions rarely come around. If you force yourself to hold a lot of positions, you could lose a lot of money, and this is because they are rarely many companies doing well at the same time.

5. You have to wait 40-50 years to become a millionaire

This is one myth that should not stand again. Who waits for half a century to become a millionaire? If you are starting with a little amount of money in penny stocks trading, you have to take bolder decisions.

By taking bolder actions, it doesn’t necessarily mean riskier actions. Applying smart strategies that take advantage of some patterns makes it possible to become a millionaire in about 4-5 years. Traditional investments with “buy and hold” approaches or jobs can’t do this for you.

6. You have to always pick the right stocks

This statement is far from the truth. There is that no trade guarantees 100% winning rates. When you encounter small losses, turn that moment into a valuable one that teaches great lessons to apply in your next trade. You should use the loss moments as learning opportunities that make you a better trader.

7. Good traders don’t lose

Is there any trader that has never encountered a loss? It is a myth, they don’t exist. Like in the previous statement, learning opportunities are all that matters. Learn to cut your losses sharply.

Never allow your emotions to dictate your trades. Do not trade with your heart, trade with your head. If you trade with your head, you know that it is all numbers. So, when you see a loss, you cut your losses without holding on to emotional reasons. Cut your losses by getting as soon as possible.

8. Low price of penny stocks means low potential

The people who criticise penny stock traders suggest penny stock trade at such low prices, so they offer very little in return. This is another fat lie.

The truth is that penny stocks low price nature mean they are always open to high growth. A typical stock may see gains of 7% or 8% over the course of a full year or more, but some penny stocks can make double-digit gains in days. This show clearly that penny stock have explosive gains potential.

9. Penny stock companies are bad or poor companies

Many of the big businesses of today were once penny stocks. They traded for pennies in the past mainly because of either the overall market, broken customer contract, or a bad quarter. So, a company trading for penny stocks doesn’t make it a bad one.

All you need to do is for you to recognise the good from the bad.

10. Penny stock is a pump-and-dump scheme

Truly, penny stock trading is a target of the pump and dump scammers. There are millions of penny stocks in the market, but only a few are pump and dump scams.

The major key here is being capable of spotting these schemes and avoiding them.

11. Penny stock trading is similar to a guessing game

This is the craziest myth of the ignorant critics. The only way of making success or failure in penny stock trading is by carrying out researches, using your head, and solid hard work.

This is far from throwing a dice or gambling. There are skills to acquire in trading a penny stock as there is in investing in other trades. Only the uneducated think penny stock is a guessing game. Conduct strong research to separate the lies from the truth.

12. Penny stocks trading is easy

If you believe penny stock is easy, that anyone can do it, then you are plain wrong.

Trading in penny stock isn’t easy. You have got to conduct your research and study different strategies. You just don’t roll out of bed, work for 10 minutes, and go back to sleep.

Serious traders spend multiple hours every day researching stocks, studying markets, and looking for indicators. The time and effort that should be put into this cannot be undermined.

13. Penny stocks are extremely riskier than blue-chip stocks

Is there any real investment without risk? Honestly, penny stocks are risky, but there is still a greater chance to lose a lot of money with blue-chip stocks that sell above $100.

If you want to avoid risk, make sure to learn the best ways to trade penny stocks and avoid pump and dump scams. Also, make sure to rightly monitor your investments.

14. The only way to make money with penny stocks is shorting

This is just another blatant myth. This may have been started by the traders who have been successful, and they say this in scaring beginners away. For new traders, shorting is quite hard. Bringing up the idea of going short adds to the complexity of penny stocks trading which traders do not like to think about.

The good news is that you can make money going long on penny stocks. You can also make money shorting them. Both ways only take skill, knowledge, and experience.

15. Experienced investors in Wall Street can’t apply same tactics

This myth is there to stuff out competition. Investing in blue chip stocks is a different game to trading in penny stocks. Unlike traditional investors, who buy and hold forever, penny stock traders have to monitor their trades frequently.

Though, many strategies, like checking for momentum, buying value, and other big stock strategies will work fine with penny stocks too. The strategies are alike; the difference is in stocks and stock prices.

So there it is, fifteen myths debunked.