Surviving Economic Turmoil (part 3/5)
This is part 3, in our 5 part series on surviving economic turmoil. Today we look at limiting losses.
LIMITING LOSSES In PENNY STOCKS:
The reasons to limit losses in penny stocks are obvious. Of course, don’t forget opportunity costs. If you put $1,000 dollars into a penny stock that goes down 20%, not only did you lose two hundred dollars, but you also lost any potential gains you could have made if that same $1,000 had been invested elsewhere.
Whenever you commit money to one place, you’re not only committing to where the money will be, you’re committing to where the money won’t be.
There are many ways to limit losses when trading penny stocks:
- Get strong, fundamentally solid companies in the first place by doing Leeds Analysis. Finding the best companies and paying bargain prices for them is the first step to limiting your losses
- Position Sizing is a very important concept. I discuss Position Sizing in detail at PeterLeeds.com
- Paper trading will help you learn the ropes, while discovering how to dodge the easily avoidable mistakes. (Keep track of imaginary trades + imaginary money, in real stocks)
- Diversification is a great way to limit your losses. You can diversify by industry, by market, geography, market cap or even the dollar amounts you put per stock.
- Avoid emotional decisions. Don’t fall in love with a company, it’s just business.
- Use stop losses. You may find that your broker, especially if you’re trading penny stocks, is not very friendly about allowing stop losses. In such a case, simply keep track of your intended stop loss in your head, so that if your stock falls to a certain point, no matter what, you liquidate your position. This prevents further downside from an investment that may be heading towards zero.
- Look for penny stocks with good trading volume. This will help you limit your losses, since you can liquidate your position easily and quickly if required. Good trading volume also demonstrates that the company is more widely followed, and therefore more likely to have strong investor interest.
- Take some profit off the table over time. That way you are proactively limiting any potential losses.
- Limit orders are an excellent way to curtail your losses. Avoid market orders.
- Trade on the better markets. There are a lot of problems with the Pink Sheet market. You’ll generally get better companies, with better reporting requirements, enforcement, regulations, and trading volume, on stock exchanges like the OTC-BB (Over the Counter Bulletin Board), NASDAQ, AMEX, and NYSE.
Overall, the very best way to limit losses is never purchase any stock until you feel absolutely comfortable with it. Know why you are investing in this company. Understand where you expect the share price to go, and how fast. Be clear about why the company is going to do well. Know at what point you want to take your profits. Take full responsibility for whatever happens, and don’t buy unless you feel very confident and comfortable with your decision.
Stay tuned for our next entry, where we discuss when to sell.