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Follow These Three Money Rules to Avoid Financial Disaster

by , 12 February 2016

Money management is one of the most important - yet overlooked - strategies for profiting with shares. Managing your money properly could mean the difference between a small loss and a total wipe out. It could even be the difference between making a profit or a loss!

In Red Hot Penny Shares, I'll tell you why our PowA! penny shares are headed higher... But I'll also tell you what to do if things don't work out as planned. So you'll get your buy and sell signals from me all the time.

Here are the three rules you've got to follow...

Money Management Rule No. 1: Never invest more money than you can afford to lose

In fact, never invest more money than you’re comfortable to lose. Penny shares, with their amazing profit potential can also be very volatile. That means you could see a 20% or even 30% swing in the price on a single day. So, on a R10,000 position you could find yourself gaining R2,000 on a day or seeing your portfolio value drop by as much asR3,000 on a single day!
 
Money Management Rule No. 2: Follow my buy-up-to price
 
A buy-up-to price is the maximum price you're willing to pay for a share. For example, I may recommend a share at 95c a share with a buy-up-to price of 110c. Once the share trades for more than 110c, it's no longer a buy.
 
From my experience, investors ignore this crucial rule most. Buying a share that’s too expensive reduces your potential upside and increases your risk. Let's say in the example above, I think a 95c share could soar to 200c. That means your upside is 110.5%. If the share shoots up in price and you decide to buy it at 150c, you’ll only gain 33%, and at a far greater risk.
 
If you can't get into one of my recommendations for less than its buy-up-to price, be patient. You'll always have plenty of other opportunities in our portfolio.
 
To ensure you don't pay higher than my buy-up-to price, I suggest using a buy limit order. A buy limit order is a request to buy shares at a specific price or less.
 
For example, if a share trades at 100c and the buy-up-to price is 90c, you’d place a buy limit order with your broker to purchase a specified amount of shares at 90c. Your order will remain unfilled in the market until the share trades for 90c or less. At this point your order will automatically be filled.
 
Money Management Rule No. 3: Keep costs in check
 
Let’s say you have R20,000 to invest. Don’t even consider splitting that money between ten different shares at R2,000 each.
 
Why not you might ask? Isn’t that good diversification?
 
No, that’s financial suicide!
 
You see, your typical brokerage costs for a buy and sell transaction will be around R200 each way. That means if you use R2,000 you’ll only be able to buy R1,800 worth of shares and pay R200 in costs, then when you sell you’ll pay another R200 in costs. All in all you’ll end up paying 20% in costs. This means even if the shares you bought go up by 20% you’ll only breakeven!
 
But if you use R6,000 to buy a company’s shares, you’ll still pay R400 in costs. But a similar 20% share price gain will give you a profit of R800 after costs!
 
So, as you can see it really makes sense investing larger chunks of money. It’s the only way to keep costs low and profits high!
 
If you follow these money management rules, my PowA! Penny Share Strategy will do the rest, and we’ll have a long and profitable partnership together.
 
 
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Follow These Three Money Rules to Avoid Financial Disaster
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