It’s human nature to want to get rich quick. One of our dreams is to hit the lottery, quit our job and just relax on the beach. Penny stocks are very tempting and lucrative. It’s very simple, its cheap and you can have huge profits but it’s also a quick way to lose you hard earned money. You can make money in one or two basura stocks and then lose it all on the next one. It’s a very dangerous world, there are a lot of manipulators and stock promoters out there that are “in” it with the owners of the companies.
For an average investor who can’t buy Ayala Corp or Metrobank, they think they are better off with cheap stocks that can double or triple in just a few days. We call that ceiling plays here in the Philippines. If you buy 60,000 shares of a Php 0.50 stock for Php 30,000 and the stock goes to Php 1 then you have made a Php 30,000 profit in 2 days, that’s double your money! However, that’s not always the case, you can also lose as fast as you win. Here are my 5 proven tips to give you an edge in playing the penny stock game here in the Philippines.
1. Never listen to Company Insiders
Never ever believe information from someone from the company. I don’t care if he is the president or if he is your dads’ best friend. An executive will always say something good about his company. Companies that pump their share prices usually have no real sustainable businesses so they just pump the prices up so they can sell their shares to the public and make money.
2. Pick the Stock with high volume and liquidity
Penny stocks usually have low liquidity which means you can’t buy a lot of shares at once or the discrepancy of share prices is very big causing you to endure unnecessary losses due to slippage in rapid change in price. Stocks should have a traded value of at least Php 7,000,000. Just stick with the ones with higher volume to make sure you can maneuver in and out of the stock with ease.
3. Take the money and run
Our goal is to make money in the shortest amount of time as possible. You are not buying the stock because of its business, or fundamentals. You are buying it for a quick buck, so when it shows you a 20% or 30% gain in just a few minutes, take it.
Greed takes over. A lot of people expect their stock to soar to 50%, the limit for the day, even holding on to it until the next day expecting another 50% return. They think it will rise to 300% or 500%, this seldom happens so it is best to always take profits as fast as you can. Don’t be greedy.
4. Position Sizing is a must
The main problem that I always encounter with trading penny stocks is how do I get out? I usually find myself buying a lot of shares than I can handle. For example, the stocks bid and ask spread is just averaging 10,000 shares then you buy 200,000 shares, what happens next will be a recipe for disaster because you won’t be able to sell your shares all at once if the price goes down to your cut loss price causing you to drive the price up and down whenever you buy and sell. Never trade more than 10% of the stocks daily volume.
5. Don’t fall in love with the stock
I know it’s hard to part ways with a stock that has given you 50%, 80%, 150% returns but at the end of the day it’s just another stock. The stock that’s being hyped up will eventually lose its charisma. The promoters will sell you the dream, how this stock will be the next big thing. When everyone you know is talking about a certain stock it might be the best time to get out.
Final Thoughts
I have been trading penny stocks since 2005 and I believe my experiences throughout the years are enough to provide you with sound advice. Even some companies that are being traded now are priced lower than the time I was trading them a long time ago. It’s pretty obvious that the manipulators and owners of the penny stocks are the only ones making tons of money every time they pump a stock but that does not mean you can’t profit with them. Follow these rules and I guarantee you will get decent results.