Investing can be a tricky game of big wins and big losses.  Controlling your emotions and money management are essential in any investing regiment.  However, investing in penny stocks can add even more elements to recognize in yourself, your trading patterns, and the companies you’re purchasing.  If you have any rules that you use please feel free to leave a comment for inclusion on an extend list.

10. Research The Management. Probably more important than the earnings of penny stocks companies since many of them will be burning money (operating in a loss) until they go into production, or otherwise are in a highly leverage growth strategy.  Their balance sheet, and cash flow statements may not look as good as some of the large cap stocks, but they have value to offer through sound management with experience who can lead them to the next level.

9. Research The Cycle. Many stocks have periods of large price appreciation and decline.  If you can spot the cycle trade it and profit.

8. Don’t Invest What You Can’t Afford To Lose. Penny Stocks are exceptionally risky.  If you don’t mind looking a statement that turns to $0 then maybe it’s not the best market for you to be in.  But the rewards are exceptional for the brave and knowledgeable.

7. Know Your Exit Strategy Before You Enter. Whether you expect a stock to double in price, sell out to a competitor, or start paying you a dividend know why you’re buying the stock and recognize the time when you’ve reached your goal and exit the position.  Also, know when you plan to cut your losses before you enter the position.  This is usually a more difficult mental commitment to make.

6. Don’t Fear Cash. If there aren’t any stocks that appeal to you after doing the research hold cash.  It’s better than investing in a mediocre company that doesn’t interest you.  You’ll save heartache and also have the cash on hand to invest when your ideal investment comes along.

5. Watch The Hype Machine. There are many penny stock newsletters out there that are pimping stocks for moves higher based mostly on their promotion campaign.  Sometimes it’s valid, but sometimes the companies are barely a legal entity.  So feel free to invest in these stocks but don’t trust anything you read on them.  Do all the work yourself to see if the hype matches up to the reality, and be very careful of gap opens and rapid sell offs.  Tread lightly or not at all.

4. Be Volume Conscious. Be conscious of the number of shares trading hands everyday.  This can drastically affect whether or not you can actually buy or sell shares.  Having a large volume will help you enter and exit your positions more easily.  Look for average volumes over multiple days, as a single day of heavy trading could be the result of a large buyer/seller.

3. The Big “D” And I Don’t Mean Dallas. Diversification.  Pretty simple concept that anyone reading this should already be aware of.  Don’t put all of your money into one stock.

2. If You Chase A Bull You Might Get Trampled. If a price has exceeded where you wanted to enter, don’t chase it up.  Read the post for more details.

1. Place Limit Orders. Don’t get killed by bid/ask price spread. If volumes aren’t large enough sometimes the spread between the bid price and ask price can be quite large.  If this is the case it will eat in to your profit by the difference in the spread if buying the ask and selling to the bid.  Be sure to place the limit orders to avoid getting killed on the spread.

Technorati Tags: Investing, investing rules, penny stock, top 10 rules, Trading, trading school