An exclusive interview with FSPInvest’s penny share master
Let’s say I’ve opened my brokerage account. I’ve put some money in and I’ve picked my first share... What now?
It’s a question I get very often. Whether you’re brand new to this or a seasoned investor, the first thing you need to do is make sure that you don’t get caught in a liquidity trap. In other words never buy more that 10% of a share’s daily traded volume.
Can you explain this liquidity trap?
Let’s say you have R50,000 to invest and you decide to put it all in one penny share. But this share only has a total trading volume of R50,000 per day – this means you just bought 100% of a shares daily traded volume when you should only be buying R5,000. Now this share goes up by 100%. That means you are sitting with R100,000 worth of it.
That means you’d end up having to wait multiple days just to sell it if the trading volumes of the share stay roughly the same… If that happens you could end up not getting all your shares sold at the price you’re looking for, or worse, you could end up not being able to sell all those share at all.
So as a rule, always make sure you buy no more than 10% of a share’s daily traded volume. That way, you know you’ll be able to sell your small cap shares easily when the time comes. There’ll at least be enough buyers to take your shares of your hands.
I reccomend you take a look at the free investing guides that I've prepared for my penny stock investors for more about this issue. You can find out more about this here.
Why you should manage your cash wisely when investing in penny shares
How much money should I invest in each small cap share I buy?
Position yourself for profits, but don’t bet the house. Never put ALL your money on the line at any single time. If you do, you could wipe yourself out on a single loser. So, my rule of thumb is this – if you have less than R30,000 then invest R5,000 in each company you buy shares of. If you have between R30,000 and R100,000 you should be buying R10,000 worth of shares at a time. And when you have more than R100,000 you should put between 5% and 15% of your money into shares you buy.
How closely should I follow your recommendations? Surely they’re just guidelines right?
Don’t buy the share outside my quoted price range – EVER. Penny shares are volatile. They often move 10%, 20% or even 30% in a single day. The biggest mistake new investors make is buying a share at any price. I’ve seen many investors buy a share after it has jumped 30% in a day, just to see it drop back to its initial level the following day.
To avoid this happening set a limit order when you want to buy a share. Basically this means you tell your broker that you only want to buy a share below a certain level. If the share goes up higher than that, you won’t buy.
But if I don’t buy the shares, won’t I be missing out?
Yes, you could lose out on one or two opportunities this way. But rather be safe than sorry. I send out around twenty four tips a year. Missing one or two opportunities isn’t the end of the world, but buying a share 30% higher than you should, could blow your profits out of the water.
Make sure you manage the thrill of investing in penny shares!
Surely this takes some self control. How do you keep your composure when you stand to make so much money?
Psychology is an important part of investing in penny shares. Like I’ve said, penny shares can go up and down very quickly. While this gives them great profit potential it can also make it a nerve wracking experience.
Seeing thousands of rands of profit swing into losses can be daunting. And if you start acting emotionally you could see yourself losing out big time.
That’s why I always say you should never trade more money than you’re comfortable with losing.
And lastly, remember, I am there all the way. So if a share is starting to get the better of you, don’t let your emotions take over.
Rather ask me your question on www.investorsclub.co.za
. I’ll make sure you get the answers you need.