If you’re new to the world of penny stock trading, you might already have dollar signs in your eyes.
While it’s only natural to get excited by the possibilities of trading, this enthusiasm can actually work against you. In the case of pump and dump schemes, other investors artificially inflate the value of a stock, preying on newbies to buy it en masse so they can sell it for a killing while you get stuck with a total stinker.
Unfortunately, nobody is immune to pump and dump schemes until they learn what they look like. Getting better at trading penny stocks means not only understanding what makes a wise investment, but also how to spot potential scams or poor trades. There’s certainly a learning curve involved with any type of trading and learning how new traders often get burned will help you advance your own career.
So, what do you need to know if you want to avoid pump and dump schemes like the plague? Stick to the following four tips for starters.
Use Common Sense
Reality check: not every trade is going to be a winner. If it were that easy, everyone would be a penny stock success story, right?
Expert day trader Ross Cameron notes that learning how to manage risk was the most important factor toward earning well over $200,000 as a day-trader in 2016. In short, you should never give a trade the time of day unless you know exactly what you’re willing to lose. When you use common sense and remove emotions and excitement from your trading strategy, you set yourself up to make level-headed decisions.
Be Willing to Get a Second Opinion
While you may think that the idea of being a sort of “outlaw” investor might be enticing, the lone wolf approach to trading isn’t always the best. When you’re part of a community that can bounce opportunities of each other, you’re more likely to get objective opinions on trades beyond your gut reaction. Whether through the likes of Facebook or forum communities dedicated to penny stocks, other traders can keep you in check.
Of course, the caveat to this is not falling prey to someone within such communities who are trying to pump and dump themselves.
Do Your Homework
Spotting a winning penny stock is about so much more than word of mouth. In other words, it’s all about due diligence. What do you know about the company behind your trade? What could be causing buzz behind your prospective trade? How well do you know the history of the stock?
Don’t Cave into “Veteran” Investors
Finally, bear in mind that not all mentors and “gurus” out there necessarily have your best interests at heart. As noted earlier, nobody is going to get their traders right 100% of the time. Even the wisest traders are prone to mistakes, so don’t feel like you must follow the advice of big names because that’s the expectation.
Succeeding with penny stocks means taking caution when it comes time to invest your hard-earned cash. Rather than go with total gambles, keep these tips in mind to avoid any potentially fishy trades. Remember: if something seems way too good to be true, it probably is.