Characteristics of a Successful Penny Stock Trader - dummies

Characteristics of a Successful Penny Stock Trader

By Peter Leeds

Penny stocks differ from larger equities or blue-chip stocks. To achieve success with these low-priced shares, you need a special mind-set. Effective penny traders tend to have many of the following characteristics:

  • Realistic expectations: Some penny stock traders think that they can turn their $100 investment into $10,000 overnight. Individuals with these unrealistic expectations generally lose money and they generally do so quickly. Realistic traders who understand what they can potentially accomplish through each investment move generally do a lot better, by making the right decisions at the right time.

  • High tolerance for risk: Trading penny stocks can come with great rewards, but because the investments are smaller and more volatile, they also come with greater risk. Fortune may favor the brave, but when it comes to penny stocks, fortune also favors those who can accept a high degree of risk.

  • Not married to the companies: Successful penny stock investors think of their shares as vehicles to profits — period. They are quick to cut losing positions and they don’t pin all their hopes on any specific penny stock, despite the upside potential of any of them. Their investment focus is less about trust in any one company, and more about balanced understanding of the potential of the underlying shares.

  • Patience: The biggest gains in penny stocks usually come over longer time periods, as the underlying companies get discovered, move up to trade on larger stock exchanges, or produce improved quarterly results. This process can take years, but it’s often worth the wait. Most penny stocks aren’t widely followed, so it’s only natural that they take a lot longer to get discovered by mainstream investors.

  • Ability to monitor companies on an ongoing basis and adjust accordingly: Penny stocks can make big percentage moves and they often make these moves very quickly. The best investors can adjust and adapt rapidly.

  • Understanding of volatility: A great penny stock on its way to higher prices can suffer massive downward moves due to the nature of the volatility inherent in low-priced shares, just as shares heading lower can leap dramatically higher. The best penny stock investors know when the volatility is not a reflection of the underlying company, know when to ignore it and when to make a quick entry or exit.

  • Ability to make decisions based on research and not impulsiveness: penny stocks can move faster, and by bigger percentages, than larger equities and other types of investments. This potential for significant gains tends to attract impatient and impulsive investors; however, they generally don’t do as well as people who base their trades on research and measured decisions.

  • Willingness to do due diligence, and then some: The most successful penny stock investors are the ones who do more than online research. They call the companies, try the products, and speak to employees and competitors. Driving by the company’s headquarters, or even doing an unannounced drop-in, tells you more about your investment than just about anything else. This type of research can make massive differences in your results.

Although many of the preceding characteristics benefit any type of investor, they are almost always found among the more successful penny stock investors.