Most people are attracted to penny stocks because they think big returns and big profits with smaller investments. While some folks can get 'lucky' and strike it rich quickly with a few trades, most will find themselves in the red unless they learn how to do it 'right'. Here are a few common mistakes made by novice and intermediate investors alike that you would want to avoid if you plan to make any money (or continue making it):
Fact checking
This phrase is very common in journalism. It basically means verifying the facts in any article before publishing it. Wondering how this is related to trading? When you hear about a 'hot' penny stock either via email or through your online research the first thing you need to do is to add it to your 'Research more' list. Some traders, especially newbies, just drop everything they are doing and start finding everything they can about this new find because they fear that they will miss out on an incredible opportunity. Nothing could be further from the truth. If you are trading penny shares there will be enough good picks coming your way once you have gotten your feet wet. Be patient. When you are looking for a new stocks to trade, you should open up your 'Research later' list and then pick one for further investigation.
Confusing luck with skill
This is more common than you would think. Especially in raging bull or bear markets a lot of investors make profitable trades. In the late 90s just before the dotcom bust happened, even cab drivers were giving recommendations. Nearly everybody was throwing money at the stock market hoping some of their picks would stick. A lot of investors made money. Was this because they had amazing investment analysis skills? Maybe a few did. The majority just got lucky. Similarly in the financial crisis of 2008-2009 a lot of traders were shorting the market when the DOW was losing couple hundred points every other day. It's easy to get it right when there are heavy trades going in a single direction. We suggest you keep an investing journal. This is where you should track every successful and unsuccessful trade that you make. After a while you will be able to see where your strengths and weaknesses lie. This one skill can make you a better trader. In fact, we recommend keeping a journal even while you are paper trading. Who said you *have* to lose money just to get the lesson?
Poor money management
This is something that annoys us to no end. Do not invest money in stocks unless you have a rainy day fund set aside with 6 months of expenses set aside. Nobody likes to lose money but the funds that you will use to invest in equities should be money that you don't need. This is not because we expect you to lose all of it. But, this is the only way you won't lose sleep over your trades. If its money you can't afford to lose, then you can expect a lot of sleepless nights.
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