Five things to look out for when buying your first penny shares – miss these and you could write off your investment account! Whether you’re brand new to this, or a seasoned investor, these five tips could help you avoid serious investment mistakes:
Master Class Tip #1: Don’t get yourself caught in a liquidity trap with penny shares
Many investors buy penny shares without regard to the liquidity of the shares. If for instance you’re buying R50,000 worth of a share that only trades R50,000 on a single day, you’re headed for trouble.
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 shares easily when the time comes.
If you don’t know where to find the daily traded volume on a share, ask your broker they’ll be able to help.
Master Class Tip #2: Position yourself for profits, but don’t bet the house on penny shares
Even when a share is liquid you shouldn’t 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.
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. Higher risk shares warrant less money and lower risk shares more money.
Master Class Tip #3: Don’t let the gains slip away from you before you buy penny shares
Penny shares are volatile. They often move 10%, 20% or even 30% in a single day. Now, the biggest mistake green investors make is buying a share at ALL costs. 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 you should set a limit order when you want to buy a share. Basically this means you tell your broker (or enter it on an online platform) that you only want to buy a share below a certain level. If the share goes up higher than that you won’t buy.
Yes, you could lose out on one or two opportunities this way. But I send out 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 is an issue…
Master Class Tip #4: Always stick to your buy range to make sure you don’t regret your buy
When picking a stock to buy, you’ve done your research. You’ve calculated a target price for the share. Now you need to decide what’s the highest price you can pay for it and still make a worthwhile profit, without risking a big loss if things go wrong.
For example: Share XYZ is trading at 150c. I say, buy below 160c. And its worst-case scenario is 110c. My target price is 300c. Now the share goes up to 170c. Only 10c out of my buy range.
If you bought at 150c and the share dropped you’d lose 26%, but if it went to 300c you’d make 100%! Now, if you bought at 170c and the share drops you’d lose 35% and if it went to 300c you’d only make 76%. Can you see how you are RISKING MORE FOR LESS REWARD if you don’t stick to the buy range? If you don’t know how to do this yourself, I publish these buy ranges as part of my Red Hot Penny Shares service!
Master Class Tip #5: Make sure you can take the thrill 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. So make sure you don’t invest with money you can’t afford to lose. And, remember, if a 10c share moves up 4c you’ve made 40%. But it can move down 4c just as quickly. Meaning you’d lose 40%. If you invest R20,000 in a share like that, it’s a loss of R8,000 nearly instantly. But if you put R200,000 into the same stock that loss would be R80,000. Would you be prepared to deal with that?
So make sure you never invest more than you are comfortable losing on a single share.
Just make sure you cover your bases. Ask yourself all these questions, set it up like a quick checklist before buying a
share and you’ll be sure to have a more enjoyable, and profitable investment experience! If you don’t do this it’s very
easy to get caught making these small mistakes that could cost you big time!
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