Investing in any stock or equity requires careful and due diligence on your part, as the potential investor. You are essentially giving your money for a part of a traded company. Whether you invest long term or short term, that statement remains true. So, would you willingly invest in a company that doesn’t make money? Would you want to own a part of a company that has no direction, no product or no profit?
Of course not.
However, that’s exactly what a lot of penny stock investors do. They blindly follow promoters and take their word on carefully crafted emails, invest their money and often times wind up on the losing end of a trade.
Promoters rely on “excitable” language to raise enthusiasm amongst their investor base which draws them to action immediately – appealing to their heart or dreams rather than their minds. “Act now” or “Invest now before you lose out, don’t miss the boat” are all very common phrases designed to make you click the invest button.
It doesn’t have to be this way. The best way a potential investor can ride the wave to short and long term investment success in penny stocks is to see through the promotions and thoroughly research any opportunity that crosses your inbox. Think first, invest after – and ignore or filter out the hype.
First, remain level headed when you receive an email from a promoter or a direct mail piece. (Yes, those are still sent!) Understand the game – these promoters were paid a lot of money in many cases to craft promotions so they are going to say anything to get you to buy the stock. The more stock they sell, the more effective they are and thus can command a higher fee in the future. So, in a sense promoters really serve two audiences – they have to make the people who pay them to promote happy, and they have to give you “real” opportunities on penny stocks. If you leave their list, again, their subscriber base goes down and the amount they can charge goes down as well.
Second, step back from the email and open a new browser window. Type in the name of the company – they will almost always give it to you in the email. Don’t look for the symbol – always type in the name of the company. Scan through the results. Look for news from reputable sources. Always look at the source of the news and try to stay away from press releases written by the company themselves.
Next, look at the company itself. If they have a website, look through it. They may have an “investors” section. On the company website, your main focus should be the products or services, and whether the company appeals to you. Is the product something you would buy? Can you see a market for it? Is it a real product or still in development? Is it in an industry that is experiencing growth or recession?
Fourth, check for scams and large scale stock promotions. Try typing in the company name followed by keywords like stock scam, pump, promotion, or trading suspended. (For example, ABC Company stock pump). If you get a lot of relevant results, this should be a red flag for you.
Finally, get a quote and trading fundamentals. Make sure the stock is trading in a healthy way and there isn’t a large scale sell off. Only execute the trade if you feel comfortable and always remember – trading penny stocks is risky. Be prepared to lose your entire investment. Establish a profit goal and stick to it. By employing this strategy you can learn to follow your head and get higher and more consistent profits rather than following your heart and losing more of your investment.