Apply these three key tips to your investing for a profitable future
Penny Share investment tip #1 – Don’t add to a losing position
I always warn investors against buying more of a losing stock. And I always get shunned for this warning. “If the share is cheaper and you’re still convinced it should go up, then I should surely buy more?” is the common line I get…
Problem is, falling shares have a tendency to drop fur ther than you expect them to.
Take the recent crash in gold shares for example. At 60c, Village looked attractive and many investors asked me whether they should add to their losing position, averaging down their losses. I war ned investors to stay on the side lines though. And the share dropped even
fur ther to 40c, as the gold price came down.
If you’d increased your shares at 60c, the ONLY thing you’d have done is increase your losses. Sure, your percentage loss would look smaller. But in rand terms, you’d be down even more. Not a smart move!
Penny Share investment tip #2 – Always remember the impor tance of the “L” word
Investors often overlook how important Liquidity is.
Penny shares aren’t well known and there are far less people trading them than the big blue chips. So it does actually happen that there simply aren’t buyers or sellers for a share at any one time.
This makes these stocks volatile. For example, if there are suddenly no buyers for a share, what is its price?
1c? 2c? Nothing? And similarly, if there are no sellers for the share, is its price now inf inity?
Here you need to remember, you’re buying into a business. The business is wor th something (which I try to estimate correctly when we buy), but the market won’t always give that business a price that reflects its value. This is simply because there often aren’t enough buyers and sellers. Not because there’s anything wrong.
But, this means you need to watch out for low liquidity. Never buy more than 10% of a share’s daily volume traded.
So, if a 10c share trades 1 million shares on average a day, you shouldn’t buy more than 100,000 shares (or R10,000) worth of the share. This makes it possible for you to easily sell later, even if liquidity dries up a little.
If, however, you buy R100,000 worth (all the shares that trade on a day), you’ll also need a whole day’s worth of buyers when you want to sell later on. And if it happens that liquidity is lower by then, you’re going to str uggle to sell your shares.
Penny Share investment tip #3 – You only need a small amount of money per share to make big money
Most investors I speak to believe they need to buy hundreds of thousands of rands in a share to make decent money from it. But you don’t.
The shares we look at are speculative. Although the have a high risk level, they have big potential.
And, while most of the shares in our portfolio will give you gains like 40%, 50% or maybe 100% in a year’s time, there will be BIG winners.
But what you need to realise here is that ALL you need is one or two shares to soar 5,000% in your LIFETIME to make big money.
Take Pinnacle Technology, for example. The share traded at 20c in 2004 and traded a typical amount of 500,000 shares on a day.
If you bought 10% of that (50,000 shares at 20c) you would’ve needed R10,000. Today, that R10,000 would be worth R1.25 million.
ALL you need is for something like that to happen ONCE in your lifetime and you’re set.
That’s the kind of gains we’re looking for. I can’t promise you we’ll get lots of them. Most investors only see events like that a couple of times in their lifetime.
But it happens, and it can make you a lot of money…
And if you thought you don’t have enough money to make good money on penny shares – think again!
Keep these three tips to prof itable investing in penny shares in mind at all times.
It’ll help you make smar ter decisions when investing.
And hopefully keep you on the right, prof itable road to penny share success!