4 Common Mistakes Investors Make in Penny Stocks

Penny stocks sell a beautiful dream, but unfortunately, it often leads to disappointments and financial losses.  Most traders invest in these stocks hoping that their 10-cent shares will yield ten times their profit, which is not entirely impossible, as seen in the case of Amazon, which started as a penny stock company and later established itself as an e-commerce giant. 

However, careful speculation is crucial to make your penny stock dream come true. Investors must carefully analyze high-potential stocks and their movement in the financial market to make the most out of every opportunity. For instance, one can keep an eye on the trending Reddit penny stocks to understand if they are worth investing in. If you are planning to invest in penny stocks, the following article delves into common mistakes that traders make when investing in these stocks: 

Mistake No. 1: Not Understanding the Market Dynamics: 

Most penny stocks belong to companies that are new or have been bankrupted for various reasons. However, most of these stocks have a lot of growth potential, so understanding them in relation to the current market dynamics is crucial. 

Even though it is easy to get lured by the low market share of penny stocks, investors must thoroughly research the fundamentals of the company issuing penny stocks. Moreover, they must also examine the company’s financial health, business model, management, and growth potential. Additionally, assessing the industry or sector the company operates in and the historical performance of the penny stock, including price movements, trading volume, and any other significant event or catalyst, are also important to mitigate the risks associated with these stocks. 

Mistake No. 2: Not Being Aware of Dilution: 

Another common mistake that investors make is not being aware of share dilution, where the company issues additional shares, resulting in the existing shareholders owning a smaller proportion of the company. 

For example, if company A has 1,000,000 shares and each is priced at $10, the company’s market capitalization is $10,000,000 (1,000,000 x 10).

Now, the company has decided to raise additional capital by issuing 200,000 new shares, which results in an increase in the total number of outstanding shares to 12,000,000. Existing shareholders still own their original shares in this situation, but their ownership percentage decreases due to secondary offerings. 

Mistake No. 3: Not Diversifying their Portfolio: 

Many new investors start investing in penny stocks without understanding the stock market fundamentals due to their promising returns and overlook the risks involved. Penny stocks are typically more volatile and carry higher risks than stocks of larger companies. Therefore, as a rule of thumb, penny stocks shouldn’t account for more than 10% of your total equity portfolio. So, if your portfolio is $10,000, penny stocks should account for only $1000. Moreover, investors should invest in two to three high-potential penny stock companies to mitigate the risk instead of investing in a large volume of penny stocks of one company.  

Mistake No. 4: Not Knowing When to Withdraw: 

When investing in penny stocks, you must carefully place a risk mitigation strategy by setting a stop-loss order on your investment. A stop-loss order is a risk management tool where an action is automatically triggered to sell a security once it reaches a certain pre-determined price, known as the stop price. This is designed to limit an investor’s loss of a position in penny stock.

Conclusion

Investing in penny stocks can be enticing and risky at the same time. However, one can mitigate the risks by avoiding the common mistakes mentioned above. Carefully understanding the market dynamics and the nature of penny stocks, diversifying the portfolio, and knowing when to withdraw can increase your chances of success in the unpredictable world of stock trading. Remember, diligence and discipline are essential to mitigate risk and avoid financial losses.

How To Buy the Right Stocks at The Right Time?

Stocks represent ownership in a publicly traded company. Making extremely high returns on our investments is all about timing. If we take a market crash and recession as an example, it is merely an opportunity to make a fortune if we were to time it perfectly.

This is why there are so many tipsters and journalists trying to speculate on the near future – they’re preying on this thirst for timing things.

But the fact that this is true doesn’t make it possible. And the fact that it’s so alluring is the very reason why we must resist the urge to time things. Time in the market, as they say, beats timing the market.

Why Timing the Market is Impossible

There are two ways to explain why timing the market is impossible. Firstly, through logic, and secondly through empirical data.

Logically, the reason why we cannot time the market is because of something called Wisdom of the Crowds. This is a theory that explains how the consensus of a population is far more accurate in their guesses than any one individual can be. For example, farmers guessing the weight of cattle can be done within 1lb of accuracy, beating any individual expert farmer.

The same goes for buying stocks. It’s a fallacy that we need to be better at predicting the market than the average person (i.e., being better than 51% of the traders participating). This isn’t enough. We actually need to be better than the consensus, which is the price itself, and according to Wisdom of the Crowds, this means even being better than 90% of your peers likely still isn’t good enough.

It’s important to know that the current price of stocks reflects future factors. For example, you’re not the only one anticipating a recession – this threat is already factored into today’s price. You can read more on Efficient Market Hypothesis to further understand this.

Secondly, it’s proven empirically time and time again that lump-sum investing is better than buying the dip, even if you are super accurate in your timings. This is because that during the time you’re waiting for the dip, the lump sum investor is making continuous gains. Before any bear market is a bull, and it can be a long one at that. Stocks take the stairs on the way up, and the elevator on the way down.

Stock Picks: Which Stocks to Choose?

So, now we know not to try and time the investments, but rather to stick with them for a long enough time to outlive dips and fluctuations, thus reaping the reward of long-term growth.

Embracing this strategy actually helps us rule out a ton of stocks for our stock picks. High growth usually means high volatility, and because we’re in it for the long haul, those short-term meme stocks become redundant. No one could possibly argue that Bed Bath & Beyond Inc. (BBBY) at $25 was one for retirement. And, if it’s not for the long-term, we should disregard it.

So, these somewhat favours value stocks overgrowth stocks; these are stocks that are considered to be good value for money, safe, and sturdy fundamentals. Essentially, not the fast-growing volatile tech stocks that are difficult to justify for the price besides the narrative of “well it will continue to grow anyway”.

Value stocks are often dividend-paying, and dividend stock are evergreen. Evergreen means that it is not under threat of becoming obsolete or out of fashion anytime soon. For example, eCommerce, Energy, and Engineering. Generally, dividend stocks fall into these categories.

Stock picking is a difficult skill, which is why it’s better to have a good mix and diversify across industries. Which strategy sounds more stable for long-term growth: having 100 fairly priced dividend stocks across 10 evergreen robust industries, or having 10 volatile expensive growth stocks all within tech? The more picks you do, the risk each individual one poses to your portfolio. This is why index investing is so powerful, too.

This is also conducive to having a passive income. Dividend stocks not only make for a less volatile portfolio, but they can create a passive monthly income for you. And you’re in less threat of dividends seizing up during a recession if you’re involved in evergreen industries with big, stable firms – many succeed in paying out during dips and recessions.

Passive investing will eradicate any desire to even succumb to the pressures of selling and timing markets – the anxiety underlying that pressure is minimal compared to high-risk growth investors. No more FOMO; no more anxiety.

Conclusion

Buying the right stocks at the right time requires a combination of thorough research, disciplined decision-making, and a clear understanding of your investment goals. By focusing on fundamentals, staying informed about market trends, and avoiding emotional biases, you can position yourself for success in the dynamic world of stock investing. Remember that investing carries inherent risks, and seeking advice from financial professionals can provide further guidance tailored to your unique circumstances.

PENN Gains After Susquehanna Prediction

Privately held trading and technology firm Susquehanna boosted its rating on Penn National Gaming stock to Positive from Neutral this week.

PENN has been described as a stock with a steady regional land-based casino portfolio whose most sensitive value driver is linked to the success of its emerging digital offering. It operates 44 facilities in the United States and Canada, many of them under the Hollywood Casino brand.

PENN observed a deep contraction in Q4 of 2021 along with its competitors, due to concerns of high competitive rivalry, and the Omicron variant disrupting sporting events. Analysts predict that PENN stock has a 59% chance of a rise during the next 21 trading days.

Moving forward, Susquehanna thinks PENN’s digital efforts can inflect positively on the back of new market penetrations, important integration milestones in Q3 and on the competitive landscape a view that Caesars Entertainment is likely to lower its digital investments.

Susquehanna notes a price target of $65 to rep more than 30% upside potential. Shares of Penn National Gaming gained 3.30% in premarket trading to $49.70.

In recent months, sports and pop-culture blog Barstool Sports, which PENN owns a 36% stake in has been hit with more controversy. Business Insider published a second hit piece about the leadership at Barstool, which was published just hours before the company reported quarterly earnings.

PENN CEO believes the timing of both hit pieces is suspicious.

Conclusion

Susquehanna’s bullish prediction on Penn National Gaming ignited a remarkable journey for the company’s stock. The confluence of factors, including the expansion of online gambling, the Barstool Sports partnership, and strong financials, all played a pivotal role in driving PENN’s stock price to new heights. This case also serves as a valuable lesson for investors about the impact of informed predictions and market sentiment in the world of finance. As the gaming industry continues to evolve, PENN’s success story remains a compelling narrative of growth and potential.