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Make Money on Hot Penny Stocks Without Becoming a Bagholder

Shares in publicly traded companies that have a price of less than one dollar are considered penny stocks. Shares priced slightly higher, up to $5, are sometimes lumped in this category, and often trade in a similar manner to their lower priced counterparts.
Since fewer investors are interested in lower priced stocks for long term investment, they often trade with less volume than larger companies that are followed by analysts and are listed on major exchanges.

How Penny Stocks Trade

These stocks are likely to trade in a narrow range for large periods of time. Penny stocks almost never provide a dividend, so funds invested in them can be considered “dead money.”

Occasionally, if these stocks attract interest, they will “pop” that is, the price will jump by a large amount, at least large in comparison to the price. A 10 cent move in a one dollar stock may not seem like much, but it is 10%, which is comparable to a $10 move in a $100 stock.

Avoid Being a Bagholder

It is not rare for a penny stock to double or triple in a short amount of time. The difficulty for a new investor to the stock is to know when a move is over. Penny stocks often double and then quickly return to their former price, or lower. Knowing when and how to sell a penny stock is important to maintain profits.
People who buy in late will see the stock drop, rather than continue to rise. These investors will be called bagholders by others. They are “left holding only the bag” while the fast money walks away with the profits.

Read on 

• Day Trading Penny Stocks
• Trading Penny Stocks Online
• Investing in a Penny Stock

What Creates a Hot Penny Stock?

Since they have a low price and relatively low daily trading volume, many things can drive changes in penny stock prices:

• News – Any type of news can result in a change in price. If a company issues a new product, or a competitor enters the market. Quarterly financial statements: or other press releases can result in attention. News from the FDA on biotech companies can move a stock significantly.
• Rumors – Since volume is generally low, a well-placed rumor can move the stock price. Especially is the rumor is from a normally credible source. Penny stocks are subject to manipulation. Illegal manipulation is subject to punishment by SEC, but enforcement is difficult and may take years. The movie “Boiler Room” shows a fictional example of illegal manipulation.

When to Sell a Hot Penny Stock?

There is no sure-fire method of identifying when a stock has hit a peak, but these are warning signs:

• Sell the news: Penny stocks that have run up in anticipation of a news event do often drop after the news becomes official.
• A spike in volume: Volume is heaviest during the run up, as traders buy and sell to take advantage of each small move with large trades. As volume declines, the price will fall slowly, but surely over several days. There may be brief moves up, as traders test for any opportunity.
• Newbies rush in: Watch message boards for signs that inexperienced traders have bought because of the price increase, who have no idea of company behind the stock. These novices are usually the last in, and become the bagholders.

Avoid Big Losses when Buying Penny Stocks
Hot penny stocks can become cold very quickly, and investors that are not nimble can be stuck with a stock that is dropping in price and does not have a reason to resume an upward move. Knowing when to sell a penny stock is just as important as knowing when to buy.