Want to know what buying strategies to use when buying stocks that can potentially return triple digit gains? In part one of this series, I told you what factors you must consider when buying a small or micro-cap stock. In part two, I’ll review intelligent buying strategies when it comes to buying small caps.

Rule Number Two: Remove emotions from your buying decisions with a disciplined strategy.

Ok, so let’s assume that you’ve done your homework now and discovered a company that you believe will run up at least 60% or higher over the next year. Decide on a predetermined buying price and do not waver from this price. Period. End of discussion.

Why?

Ok, let’s take a look at hypothetical stock YYY. Company YYY is the industry’s leading innovator in a huge growth industry that has seen the biggest growth spurts in history for the last three trailing quarters, yet the general public still does not know about them. In addition, they have patented technology that lets them protect their first mover advantage and high entry costs into the industry gives them nice barriers to entry. On top of all of this, Company YYY is trading at a ridiculously low P/E and a ridiculously low price of $3. In fact, its price would have to appreciate 200% just to equal the P/Es of the giants in the field. You study YYY’s historical price chart and see some volatility, so you decide you will wait until the price drops to $2.80 to get in. But in the two days you wait for company YYY’s stock to drop in price, it unexpectedly shoots up to $5.50. Or perhaps it plummets way below your $2.80 buy in price to $2.00. On no new significant news.

Depending on what scenario happens, you may be thinking “I’m so dumb not to have bought at $3. I guess I’m just going to have to bite the bullet and dive in at $5.50,” or “This is so great. I wanted to get in at $2.80. Now it’s so much cheaper at $2.00 that I’m definitely going to buy now.”

Right? Wrong.

Stick to your original plan. If you throw your buying strategy in the trash and decide to get in at $5.50, you’re letting emotions drive your decisions instead of logic. If you were only willing to pay $3, why would you possibly be willing to pay 83% more for the same stock just 48 hours later? And if we consider the second scenario where the stock plummets to $2 a share, don’t you think that this merits more caution instead of haste? Remember, in both hypothetical situations, we are assuming there is “no new significant news” surrounding stock YYY to justify these huge price movements. Under these assumptions, the volatility of the stock is probably occurring because of jumpy day traders taking profits off the board or dumping shares.

But let’s take a closer look at why letting emotions creep into your decisions is a bad idea. Let’s look at the situation again where stock YYY blew through your designated buy in price of $2.80 and went to $5.00 in two days. Let’s assume you stick to your guns, wait two weeks, and buy-in when YYY stock finally dips to $2.80. Now employing a stop loss of 15% against your buy-in price, your sell-out price of the stock is $2.38 versus $4.68 if you had bought the stock when it spiked up to $5.50. This huge gap in stop-loss price points may very well be the difference between holding on to the stock and earning 80% gains versus selling out 48 hours later and feeling confused as to whether or not you should buy back in.

To summarize, never throw out a pre-designated buying price for a risky stock due to unexpected price spikes. If this happens, stick to your original buying strategy if you still believe in the stock and wait until volatility decreases before you buy at your pre-designated buy-in price.

Remember, there are literally hundreds of stocks every year that make rapid double or triple digit gains. If it turns out that you missed out on one opportunity because the stock soared right through your buy in price and kept soaring higher or the stock’s price took a sudden plunge, know that there are hundreds of other opportunities waiting to be discovered. If the stock you loved so much never returns to your buy-in price, move on. You’ll find a better stock to buy soon enough.

? 2006 Global Market Opportunities

About the Author

John Kim is the founder of Global Market Opportunities. He has over thirteen years of experience in finance and financial services with two Fortune 500 companies. To learn how to discover small and micro cap stocks that consistently and significantly beat the market indices, click the link, Learn to Invest Money and Achieve Financial Freedom

Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles.

1. Penny Stocks are a penny for a reason. While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.

2. Trading Volumes Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn’t trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding “dead money”, where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.

3. Does the company know how to make a profit? While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?

If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an entry and exit plan - and stick to it. Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you’re out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.

If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential.

5. How did you find out about the stock? Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.

Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.

How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities? You’ll start to notice quickly if you have subscribed to a good newsletter or not.

One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you’ll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?

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Trading Penny Stocks | investment strategies for penny stocks
1source4stocks.com provides penny stock traders with online trading and investment tips, online trading strategies and penny stock picks.

To make money in the stock market, setting stops is an imprecise science and involves a lot of trial and error, but it is an integral part of being a successful trader. A good analogy is to compare stops to buying insurance for your business. Should you avoid insurance altogether just because you`re not sure exactly how much you need, or because it will cost you a little money? No. Instead, you estimate and do the best you can, and in the end it will be well worth the effort.

Where insurance limits risk of loss through disasters, stops limit your risk of loss on bad trades. Stops make it possible to take small losses and get out when a stock goes against you, protecting your capital. Yet, some traders find that they are unwilling to take a loss on any stock. They don`t want to admit that they made a mistake.

Another key to make money in the stock market, what often separates a good trader from a bad one is the ability to take small losses. Your goal, as a successful trader, is to take small losses and make big gains. If you do this, you`ll be profitable. But, you ask, what if you stop out of a stock you still want to trade? Well, you can always buy it back later, and likely at a better price, if the trade still has potential.

Besides limiting risk and helping you take small losses, stops are valuable because they protect profits on winning trades. As I discussed in a previous article, you must lock in your profit when you trade, or you can lose it. You can ensure that you keep your profits by using trailing stops. A trailing stop is a stop order you place below the current price of a long position, progressively moving it up as the price of the position increases so that the stop follows the position up. For a short position, to make money in the stock market you set a stop above the current price and then move it progressively down, following the position as it trends downward.

This means that once you have a profit, you move your stop nearer to the current price so you`ll stop out with most of your profits intact if the position moves against you. If the stop executes and you decide you want to trade the position again, you can buy it back at a better price than you sold it for and then ride it up again. That`s how a good trader makes and keeps money, make money in the stock market by taking small profits multiple times, rather than risking too much waiting for a big win.

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This warning goes out to newbie investors, and more times than not, it falls on deaf ears. But I’ll repeat it one more time just for posterity’s sake: if you’re new to investing, be very careful of making investments in penny stocks. You will undoubtedly be very attracted by the potential returns due to the deflated share prices, but keep in mind that things are usually not what they seem to be, and sometimes penny stocks really are “too good to be true.”.

Why do pennies pose such a risk? In a word: reporting. Or more accurately, lack of reporting. Since Over the Counter (OTC) stocks are not listed on any exchange, they don’t have to follow the stringent reporting criteria which we’ve all become accustomed to for major exchange traded stocks. What this means is that these companies generally offer very little financial guidance, and tend to rely much more on hype than exchange traded stocks.

Penny stocks usually have very small floats (the amount of shares actively traded) and for this reason, coupled with thin capitalization, the stocks can be manipulated quite easily by several buyers or sellers, and some news or rumors. Many penny stock companies use spam email to promote their products. They send out to large groups of internet users who end up becoming interested in the stocks. As the emailed people start buying, the price goes up, and the investment starts to look like a great deal. At this point, the pump and dumpers will start selling all the shares they can, and the investment will come back down to Earth. The pump and dumpers make the money, and the investors who come in later are left holding the bag.

These pump and dump schemes are extremely common, and penny stocks are almost always what are used for the promotion. Particularly vulnerable to this ruse are small and new investors who have tiny amounts of capital. Most of these types of investors want to accumulate a large amount of shares with the hopes of turning a meager $200-$500 investment into a retirement nest egg. Most end up losing their capital.

These warnings might seem obvious, but it’s amazing how often people lose their head when dealing stocks. Most people feel that the number of shares is their best chance for making profits. They feel if they can but 100,000 stocks for 0.001 that somehow they’ll get rich if only the stock hits 1 cent! This is true, of course, but almost never happens. Most stocks that sell for fractional pennies are more likely to stay in that neigborhood rather than to rocket to even $10.

Remember that the only metric you need concern yourself with as it relates to investing is total returns. The higher your percentage return, the more money you have. You will never end up concerning yourself with share price if you are a studious investor. It’s meaningless in the final analysis. For savvy investors who do a ton of research, finding a bargain in the penny stock heap is possible. Once you’ve done a few trades of “normal stocks” give it a try, but lay off the pennies until you have a very good understanding of what makes share price move.

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