How to handle the highs and lows of investing in penny stocks

by , 05 August 2017
How to handle the highs and lows of investing in penny stocks
Investing in penny stocks can be an extremely profitable venture, but with that comes higher risks.

This means it's vital you handle your portfolio and risks to deal with this.

So how can you go about doing this?

Read on to find out…



How to manage your penny stocks portfolio


Of the portion of your portfolio you decide to invest in penny stocks, you should aim to invest in between eight and ten of them.

By investing in any more, you can over-diversify. If you find a new penny stock opportunity, it’s worth selling out of one of your holdings to keep your portfolio at ten or less.

Investing in up to ten penny stocks allows you to spread your risk over the different stocks.

When one of your penny stocks has made substantial gains, you should always consider taking some profits.

For example, you could consider top slicing. This means if a stock rises 100%, you sell half of your holding. This means the money left in the market is pure profit. 

Related readSecret R10,000 Retirement Blueprint!


How to handle the risks of investing in penny stocks


You need to take steps to manage your risk. Diversifying your portfolio helps to lower this risk, but it’s also important you don’t invest too much in one position.

For example, stick to risking between 2% and 4% of your portfolio in each stock.

You could also consider using trailing stop losses. As penny stocks can be a bit volatile, running a wider stop loss can help you deal with these movements.

A standard stop loss is usually between 20% and 25%, but you could increase this to between 30% and 35% or a level that suits your risk profile.

Also beware of investing in penny stocks that aren’t very liquid. Buying illiquid stocks brings a couple of problems:

  • The difference between the buying and selling price can be large; and
  • You can struggle to sell your holdings when you want to.

So there you have it. How to handle the highs and lows of investing in penny stocks.

Related readSecret R10,000 Retirement Blueprint!

 



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