The 3 Great Dangers of Trading Penny Stocks

While most of us get over excited when that hot new penny stock drops, the really smart traders tend to have “common sense” amidst the hype. Getting carried away and being sucked in emotionally is one of the great dangers of trading penny stocks. It is emotion and not so much actual stock performance that’s the real risk in trading small cap stocks.

Small cap stocks have many great advantages and if you can summon the courage to start trading penny stocks you will learn very quickly. Since it requires very little to get started, anyone can do it. It may not be the ideal way to learn trading, but the lessons you will learn will be priceless if you ever want to move on to trading on the major exchanges. In terms of volatility and learning to think on your feet, penny stocks can be a great teacher.

Although a lot of people try and sell the idea of penny stocks as “easy money” and “fast cash” the truth is that you can lose your shirt – very quickly if you don’t know what you are doing. There are 3 great dangers when trading penny stocks. I hope they will help you to limit the risk and open your eye to what’s really going on.

1. Know who you are investing in
When you buy stocks of companies like Apple, Google or Ford you know what you are buying right? Well although most of the great stocks on the major exchanges are of far less known companies at least you know that these major exchanges are offering you some protection and security.

With penny stock, the companies are far less reliable. In fact many of them don’t even have a product or revenue (yet). They are start up companies looking for venture capital to expand and develop their business. Often times it never even gets off the ground.

2. Trading on hot tips
In the arena of penny stocks “hot tips” and “insider info” is a rampant problem. Companies trying to push their small time stock will do anything to get trading momentum on their stock. Creating hype and using what I call “trade bait” is a very popular way of getting people to buy the next big thing.

Most people want to make fast, easy money and we all want that secret that no one else knows about. Often this is what penny stocks flourish on – only to leave investors angry and in disbelief when their stock folds. The solution is simple: never trade on so-called tip offs or insider secrets.

3. Trading on emotions
The best traders in the world are often those stone-cold and hardened people who can block out their emotions. This is no coincidence. Emotion is the greatest enemy of trading success.

When the lure of a 1000% profit on a 10 cent stock comes around. Most people just get carried away – wanting to buy as much as possible as quickly as possible. After all, this can make you rich by next Friday, right?

Never allow your emotions to get the better of you. Always check yourself and keep your cool. A great way to overcome this is to always sleep on it before you make a trade on some super hot stock. That way you will have time to think about it and allow your emotions to calm down. Also, never trade more than 20% of your capital in a single trade. Even if you lose on emotion, at least you won’t lose your shirt.

Find out more about small cap stocks and how to pick hot penny stocks

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