What are Penny Stocks?
Penny stocks are the stocks of companies with a 'market capitalization' or market cap, of less than $1 billion. A company's market cap is a measure of its total market value. It is determined simply by multiplying the price of a share of stock by the total number of shares out in the market ('outstanding shares').
Most often, the relatively low market cap that penny stocks have is due to a low price per share (PPS for short). Since it is a "small" market capitalization, penny stocks are also referred to as 'Small-Caps'. The price of a small-cap stock can have a wide range, therefore, depending on the outstanding shares. However, many small-caps have prices that can be measured in pennies, hence the name 'Penny Stock'.
There are even 'Sub-Penny' stocks, that trade as low as .0001 dollars (one one-hundredth of a penny!). A stock that trades at .0009 or less is referred to as a "trip-zero" penny stock (click the link for much more info on trading trip-zero's). Stocks that are priced this low are often referred to as 'Micro-Cap' or 'Nano-Cap', with market caps of less than 250 and 50 million dollars respectively. This isn't to say that all micro/nano-caps have share prices in the sub-penny, or penny range, however. There are many micro and nano-cap stocks that trade in the dollar range. These terms are typically used very loosely.
Why should I trade penny stocks?
Trading penny stocks, while inherently risky, has a unique and exciting quality. Penny stocks are the fast movers of the stock market. While large stocks such as IBM and Microsoft lumber along like the giants that they are, penny stocks often race around like Ferraris. Think of it this way, for you to double your money in a $30 stock, it must go all the way to $60. To double that same money in a stock that is $.01, it must only gain one cent to get to $.02...
Now, let's think of this in terms of 'market cap', the market valuation of the company. For comparisons sake, lets say both stocks have 100 million 'outstanding shares'. If the $30 company doubles, its market value rises by 3 billion dollars! For the $.01 company to double, its market value must only rise by $100,000. Essentially, the expensive stock requires much much more money input, or buying, for the price to move. This is why penny stocks can move so quickly, and make you a profit in very little time.
Looking below, you can see how a penny stock and a large blue chip stock are compared. Think of the depth of the liquid as price, and the volume of the liquid as the market cap. The market cap is virtually related to money input (buying of shares). The penny stock with the small market cap, requires very little money, or "liquid", to create a change in the price, or "depth". Where as the huge blue chip stock takes much much more money input.
What else makes trading penny stocks different?
One of the major differences between trading a penny stock and a 'blue chip', for example, is the amount of - and ability to find - information on them. For the most part, penny stocks trade on either the 'OTCBB' exchange (over the counter bulletin board) or on what is called the 'Pink Sheets'. Pink sheet stocks have no reporting requirements, and are often a small company's first attempt at being publicly owned. OTC stocks do have requirements, but they are not as intense as stocks listed on major exchanges. With less information available, penny stocks easily become valued based on pure market speculation and can be easily influenced by internal and external forces. For example: The company itself could be a complete scam. The stock could be under promotion by a paid service in an effort to increase investor interest. Groups of traders could be working together to convince others to buy, while they sell into the resulting rise. The 'Market Makers' (professionals that act as buyers and sellers to maintain an orderly market) can also easily manipulate the price of a stock to a fairly drastic degree.
So, while penny stocks do offer the potential to rise 100%, 200%, or even 1000% in a short period of time, they also carry with them some big risk factors. To be successful trading them, you must find the stocks that have the best potential, fewest number of "red flags", and have a strategy that will let you lock in solid profits and reduce risk. Check out the links below for more information on stock scams and the corruption in the stock market.
Is penny stock trading right for me?
If there is one sure thing about penny stocks, it is that penny stocks aren't for everyone. If you are only looking for a safe, solid investment that will slowly grow in value over years, penny stocks are not for you. If you think of penny stock trading as a form of gambling, you may win a few profits, but in the long run you will probably not succeed. Penny stocks, like any investment, demand discipline and patience. On the other hand, if you have money you can afford to lose, penny stocks are an exciting form of investment that can possibly earn a large return in a short amount of time.
To increase your chances of gaining wealth with penny stocks, you must increase your level of knowledge. This is why this site can help you succeed. With the right basic stock market knowledge, you are starting off on the right foot. Learning how to trade stocks is like learning a new language, not many people can do that without hard work and studying.
Often, experienced traders will diversify and utilize a portion of their capital to trade penny stocks. This way they have solid, long term investments to protect the majority of their money as well as penny stocks to provide the chance for large, quick gains. For most beginners, this isn't possible, but it is a suggestion for allocating future gains that a successful penny stock trader may earn.
What is a Reverse Merger?
A 'Reverse Merger' (RM) is a method by which a private company can become a public company. To do a reverse merger, an already public company will issue shares to acquire a private company that has a business and value to it. Normally the public company has little or no actual value, other than the fact it is already active for public trading (having a stock symbol and exchange listing). This public company is known as a 'shell', or 'shell stock'. This is an accurate metaphorical name since the "shell" is a legitimate company, but has nothing of value "inside".
Reverse mergers, or reverse takeovers (RTO) as they are also known, are a popular method for a private company to become public. Most people know of the IPO (initial public offering) as a way for a company to go public, but the reverse merger is not as well known. It has some key advantages and disadvantages in comparison to the IPO. On the good side, a reverse merger is much cheaper and can be completed faster. On the bad, there is no capital raised through the process, unless dilution occurs after its completion. There is much less exposure for the stock since major investment banks are not involved, and the stock generally trades on a small exchange such as the OTCBB or PinkSheets.
For penny stock investors, reverse merger plays can be the most profitable of them all. Many RM stocks have exploded more than 1000%, the highest of recent reverse merger stocks, LFZA (now USSE) soared to a high 420,000% greater than pre-RM prices. Investors must be careful, however, since companies have been known to use the reverse merger as a means to create a "pump and dump" scam. If the company proclaims outrageous profits, assets, or projections, beware. If it sounds too good to be true, it probably is. Some of these stocks might be a good trade, but usually only in the very short term. A legitimate company with realistic claims and a sound business model may be a very good investment. These types of stock slowly work their way toward fair market value as investors methodically accumulate shares.
What is a Forward Split?
A 'Forward Split' (F/S, FS) is the opposite of a reverse split (see next page), and is most commonly done at a 2 to 1 ratio. For every share you own, after the F/S you will own two shares at half the price each. This is normally done to bring high prices down to more attractive levels for small investors. A forward split is usually a good sign of company growth and continuation of the share price increase. A forward split is normally not a common occurrence for a penny stock, since the price per share (PPS) is already very low. Penny stock companies would be more interested in higher prices which are required for 'uplisting' to bigger exchanges (NYSE, Nasdaq, etc).
What is an Uplisting?
An 'uplisting' is the process of moving a stock to trade on a higher exchange. In the penny stock arena, the most common uplisting is from the PinkSheets to the OTC Bulletin Board (OTCBB). While it is possible for an OTCBB stock to uplist to a big board such as the NYSE or Nasdaq, it is a very rare occurrence. The reality is that few penny stocks actually succeed to the point that they meet the requirements of a listing on a big board. Stocks that are able to uplist, are showing real promise to be considered as a good investment.
An uplisting is a sign of continued growth and success. Once again, however, beware of companies that promise an uplisting and then never seem to deliver. It is often only a ploy to create buying which the company can sell shares into. No deadlines, missed deadlines, and scarce information on the companies financial performance are all red flags when a company is promising an imminent uplisting. Uplistings take a substantial amount of time and money due to the required audits, paperwork, and legal issues. If the company has never issued any reports of their performance, chances are that they either have a long way to go to become uplisted, or have no business being uplisted in the first place.
What is a Buyback?
A stock 'buyback' is the act of purchasing shares from the open market by the company. These shares were once issued in the initial formation of the public company, and/or as a means of raising capital. To increase share value and entice investors to purchase and hold a position, the company can buy back shares. This is essentially the reverse of dilution, and has a very positive effect on the stock. While a rather rare occurrence, successful companies that value their shareholders have been known to roll profits into a buyback program.
Penny stock investors must, however, be wary of scams that promise a stock buyback, while in reality the company uses the "good news" to sell shares. Often times, the press release will state that the company plans to buy back "up to" a certain amount of shares. "Up to" could mean the company is only going to buy one single share! While the hype of a stock buyback on a scam stock could provide ample opportunity for a profitable trade, long term investment in this case is not a good idea. Again, if the company is promising things that seem too good to be true, beware.
To stay safe playing buybacks, only invest in companies that are fully reporting (ie: OTCBB stocks or better), show a solid and viable business model, and profits on their financial reports. Otherwise, the company most likely has no means at all of affording a stock buyback.
What is Dilution?
'Dilution' is the issuance of additional shares to the 'outstanding share count'. While not such a bad sounding definition, the impact of dilution can ruin a shareholder's position in a stock. The additional shares effectively 'dilute' the value of all shares on the market. Think of it like a pizza. The pie represents the market valuation of the company, while the slices represent the individual shares of the company's stock. When the company sells new shares, the pie doesn't get bigger, the slices simply get smaller. The investor is left with smaller slices.. or.. cheaper shares. Or if you want to think back to our swimming pool vs. coffee cup model model, dilution is like making the cup/pool wider. The increased capacity causes the liquid level, or price, to drop.
The direct effect of selling new shares can often be far more damaging than the proportional increase in shares warrants. Selling shares on the open market drives down the price; supply is increased, while demand stays the same. Without care a company can send their stock into a dilutive spiral that is very damaging to shareholders.
The purpose of dilution is for the company to raise money, plain and simple. In the grand scheme, the purpose for a company to go public in the first place is to provide a means for raising capital. You must find companies that do so in a responsible manner, without hurting shareholders. Always keep this in mind when trading any stock, and you will fall victim to dilution far less often.
What is a Reverse Split?
A 'Reverse Split' (or R/S, RS) is a method by which a company reduces the number of shares on the market and increases the stock price proportionally. Reverse splits are done at a specific ratio: ie - 10 for 1, or 10:1. This ratio would mean that if a shareholder held 1000 shares at 1 cent, after the reverse split the shareholder would be left with 100 shares at 10 cents each. The value of the position does not change from the reverse split... at least not directly from it.
Companies usually do a reverse split to increase the price of the stock to more attractive levels, or to remain at a minimum price for a particular exchange. While not necessarily a bad thing, a R/S is a popular method that bad penny stock companies use to continue raising capital through dilution. 'Dilution', if done enough, will eventually leave a stock virtually worthless. The price may go as low as .0001 dollars, the minimum that stocks are tradable by common investors. At this point the company can no longer effectively raise capital by selling more shares.
By performing an R/S, the number of shares on the market decrease, and the price increases back to a "dilutable" level. The dilution starts again, and the cycle can continue over and over. Because of this, a black cloud is associated with the R/S. They normally result in a large selloff by remaining shareholders, causing the price to plummet, and the shareholder value to follow suit.
A reverse split is very rarely an opportunity for a safe investment, and certainly not a wise choice for a beginner in penny stocks. To protect yourself from purchasing the stock of a company with a history of abusive reverse splits, check out this iHub board and scan through the list.
What is a Dividend?
A 'Dividend' (divi, divy) is a form of compensation a shareholder is given for holding a stock. They can be given as cash or stock and are normally paid for by company earnings. Typically, stable companies that are beyond the growth phase issue dividends to give shareholders a reason to retain an otherwise unprofitable stock.
With penny stocks, dividends are often given in the form of extra shares. Each shareholder receives a number of shares determined by a percentage of their current share count. For example, with at 20% dividend, a shareholder with 1000 shares would be given 200 shares. While this seems like an incentive to hold the stock, it often comes back to bite the holders. With these "free" shares coming into investor's hands, some, if not many of them will be sold at market prices to "cash them in". With this reputation, dividends and their announcements can often lead to a selloff. With penny stocks, a stock based dividend is essentially a form of dilution that is used to entice shareholders to buy, or continue holding the stock.
Advanced: Some penny stock investors, however, believe dividends can serve another function. If the stock has a large short, or 'naked short' position, it is often rumored that issuing a dividend can force the shorts to cover their 'short sale'. The resulting buying can then create a rapidly rising stock price AKA a 'Short Squeeze'. While this may very well be true, the question that needs to be answered is whether or not a short position even exists. Traders are often seen on message boards screaming "Short, Short, burn the Shorts!" - While the company plays along with them by declaring a dividend, a 'NOBO list', or filing for a new symbol. The hype of the possible short squeeze creates rapid buying itself, possibly resulting in a run. If the short actually exists, one can see some of the fastest percent increases in share price, and very high volume. If there is no short, it will normally result in a quick pop followed by an even faster drop as the "orchestrators" and pumpers sell out. These situations may be profitable for seasoned penny stock traders, but they are not recommended for beginners.
What is a 504?
A '504' refers to rule 504 of Regulation D. Regulation D is an SEC regulation which provides exemptions for companies to sell securities without having to register them with the SEC. Rule 504, specifically entitles a company to sell up to $1,000,000 worth of shares within a 12 month period of time, without having to register said shares. Essentially, rule 504 is a method for a company to quickly raise money through selling shares. While it is not considered the worst form of dilution, such as toxic convertible debentures, it is still dilution in the end.
Normally the shares sold must be 'restricted', meaning that they cannot be sold for a period of time (usually a year). This prevents immediate dilution, but the company must perform at some point, if the 504 shares are going to be held longer by the original purchasers, or absorbed by new buyers on the open market. In some cases, the shares may not be restricted. Click the link below for a more technical explanation, and circumstances in which 504 shares can be sold as non-restricted.
What is a "Gagged" Transfer Agent?
A 'Transfer Agent' is a company's means of managing shareholder records, issuing and canceling stock certificates, and processing investor mailings. Some companies can act as their own transfer agent, but most often, especially with penny stocks, the job is outsourced to companies specializing in the business. Transfer agents are normally the most accurate, and often the only way of finding the current O/S, A/S, and float for a penny stock. Some will require a fax with shareholder details to retrieve the information, others simply a phone call or email. This type of transparency is desirable among investors.
A "Gagged" transfer agent is one which has been instructed by the company they are working for to not release information, such as the share structure. This is usually NOT a good situation. There is no legitimate reason for a company to gag their TA. It is almost always done to hide dilution. Some TA's, however, have a policy against releasing share structure information. The reasoning behind this is to keep the thousands of penny stock traders from bogging down their business with requests for information. Unfortunately this forces the shareholder to contact the company for information. While this isn't as bad as a company specifically gagging their TA, it still isn't an ideal scenario. Whether the company sought out this TA because of this policy, or it was a coincidence, is up for debate.
Without knowing the current number of outstanding shares, an investor has no idea if shares are being sold by the company. Concurrently, without knowing the number of authorized shares, the number of shares that can possibly be sold is not known either. Companies that practice this scam will often issue press releases, or other investor communication containing excuses for having the TA gagged. Unknowing investors will buy these up, and continue holding shares, or even buying more. We do not recommend touching a stock with a gagged TA, unless you are experienced with penny stocks, and it is purely a short term momentum play.
What is Technical Analysis?
To start trading without the advice or research of experts... finding hot penny stocks, researching them, and determining where to buy and sell are all tasks that will be on your shoulders. The next best place to start your venture is in the realm of technical analysis, the basis of technical trading.
To find the stocks that are likely to move, many traders run what is called a 'scan'. A scan is basically a filtered search of all stocks. One can set filters to find stocks with abnormally high volume, price movement, or any combination of a multitude of other indicators that can identify hot penny stocks. Hands down, the best tool/service to scan and filter the penny stock market is EquityFeed. Check out our Full Review of EquityFeed to see what this system is capable of. Once you find some interesting stocks with your scan, then it is time to check out their charts.
What are some Stock Scanning Tools?
Arguably the best service a trader can use to find the hottest penny stocks is EquityFeed. A subscription to EquityFeed's Microcap service gets you pro-level real time charts, level II quotes, active stock listings, screening and scanning utilities, pattern matching and much more. The price of the subscription is substantial, but the advantage it gives you over the average trader greatly increases your chances of success, and your profits. We use EquityFeed at Penny Stock Nation and we easily make back the subscription price with profits. Check out our Full Review of EquityFeed.
Another good tool to use is StockCharts.com's Stock Scan page, featuring a listing of many common predefined scans with links to qualifying stocks, as well as the ability to create your own scans. The main disadvantage of this tool is it is not real time, and not streaming. This is fine for slow trading strategies, but won't give you the 'quick-jump' advantage over other traders.
If you have TDAmeritrade®, you can use their screening utilities, including the new Pattern Matcher™ tool built into the Command Center 2.0. This is an great tool for finding stocks that match a particular chart pattern (e.g. cup and handle, double bottom, etc). This is a free utility for all TDAmeritrade clients. Also useful is the Advanced Analyzer, a desktop utility allowing selection of 100 preset conditions for screening stocks. This is free for all TDAmeritrade Apex clients.
You can also screen stocks with a basic screener from one of the websites below. These allow you to define market sector, price range, PE ratio, volatility, and much more. Most are geared for small to large- cap stocks however, and may not be best suited to finding hot penny stocks.
What is a chart?
A stock chart is a graphical representation of that stock's trade data, collected every minute of every day. A very basic chart will show the price of the stock on the Y-axis vs time on the X-axis. Along with this there may be an 'indicator' or two. An indicator takes the input data and outputs a result based on a specific mathematical operation. Indicators allow chart readers to gain further insight into the trading that is occurring. There are tons of different indicators, but even a basic understanding of the popular ones will be a big help.
What are Fundamentals?
Fundamentals can include a company's financial reports, as well as non-financial information such as growth estimates of the demand for sold products and competing products. Investors will also look into new regulations or demographic changes, and economy-wide changes.
When examining financial reports investors will look for improvements in earnings per share, top line revenue, reduction of expenses, cash on hand, and several other variables. The disadvantage with many penny stocks, pink sheets being the worst, is that financial reports may not even be published by the company. Also, even if they are, unless they are audited by a legitimate third party you are taking they company's word as to their accuracy. To learn more about finding and evaluating financial statements.
What is Share Structure?
Share Structure is a breakdown of the amount of, and types of stock the company has issued. The number of 'outstanding shares' (O/S) as well as the number of available shares on the market, the 'float', have the biggest effect on how a stock will trade, or in other words, how hot the stock might get.
What are Outstanding Shares?
Outstanding shares are the total number of shares issued by the company, including free trading and 'restricted' stock.
What shares consist of the Float?
The float consists of all the outstanding shares that are not restricted. Essentially meaning the shares that are available to exchange between traders/investors on the open market.
How does the size of the Float affect a stock?
To understand the mechanics behind share structure, let us consider the effect of the float size. The current float of a stock is the number one factor that determines how a stock will react to buying and selling pressure. If there are tons of shares available on the market, ordinary share holders and 'market makers' will be able to sell these while the price moves slowly and in small increments. If the float is low and buying pressure is high, the price will be forced up to levels where shares are available. So, the ideal stock is one with a relatively low number of outstanding shares, and a relatively low float. There is a negative side of having too small of a float, though. Without many shares "floating" around, it may be difficult to purchase shares without 'chasing' the ask. The more money you are trying to put in,
the harder it will be. On the other side, it will often be difficult to sell your shares once you have them, unless there are enough buyers, a big enough buyer to sell all of your shares to, or you are willing to sell your shares for a substantial discount from the current price. Because of this, low float stocks can be very volatile, moving huge percentages in a matter of minutes, or even seconds. These can be far too dangerous for beginners, and should be traded only after some solid trading experience.
To start off, you will want to trade a stock with a medium number of outstanding shares, and medium float. For penny stocks this generally equates to an O/S count of around 100-500 million, and a float ~50-90% of the O/S. This is going to vary depending on the price of the stock. Stocks with a higher Price Per Share (PPS) can be just as easy to trade having a lower O/S and vice-versa.
What are Restricted Shares?
It is usually good to see that the company has some restricted stock issued, and a float lower than the O/S is indicative of this. An investor doing his homework will try to find out who is holding them, and beware of when shares may become unrestricted. Restricted shares are often times issued to others as payment for a service; ie - website development, consulting, legal services, etc. Beware that when they go un-restricted, usually after one year, the individual(s) may dump the shares at market to cash in. Restricted shares are also often held by company insiders. If management, including the CEO, are accepting restricted shares as compensation, you might infer that they have a vested interest in seeing their stock do well... If they keep holding them past the restriction period, this is an even better sign.
What is an Authorized Share Count A/S?
Above you see that when I talk about the float, I specify that the current float is what is important. In addition to the O/S and float, there is also the 'authorized share' count, or A/S. This is the currently authorized maximum amount of shares that can be issued into the market. This number reveals a very important thing; the number of shares that can be sold into the market by the company, AKA 'dilution'. For this reason, traders will often be reluctant to load up shares if the O/S is much lower than the A/S. The reason being is the less shares the company has left to sell, the lower the chance of destructive dilution. Be aware, however, that a pink sheet or OTC company can increase their A/S on short notice.
If the company's transfer agent, or TA is "gagged", you will have no way of knowing changes to the A/S, O/S, or float. We do not recommend playing a stock with a gagged TA for anything more than a quick trade. If the stock isn't gagged, it may be prudent to contact the company and/or transfer agent on a regular basis to confirm there are no increases in the share structure. This way you will be one of the first to know of dilution, and can sell before losing a chunk of your investment. Click the link below for more information on gagged transfer agents.
What price should I pay?
If you have done your homework and found a truly great stock as described in the last section, the price you found it at may be just fine. If the stock is popular already, however, the price may already be moving rapidly.
First of all, DO NOT chase a stock. 'Chasing' refers to raising your buying price rapidly in a desperate effort to get the shares. Most of the time this is a very bad idea. When a stock starts running your emotions will try to take over, a tendency that must be overcome. Other chasers will eventually have their orders filled and buying pressure will drop, leaving the price to follow suit. If, by chance, you miss a big run, try not to worry about it. Remember that stocks virtually never go straight up, and by not chasing you are greatly reducing your risk of a loss. If you absolutely have to get in, and you are confident the run has more steam, try not to chase much more than 5%. Set your entry price and stick to it. Let the price come to you.
Should I buy all of my shares at once?
If you have a limited amount of funds, you may not have a choice. With only $500, for example, splitting your acquisition into two buys increases your commissions to an impractical level. With $1000, however, a couple of buys may be a smart move. Doing this is a way of decreasing risk. If the price drops after your first buy, you have only risked half of your money, decreasing risk. If things look bad, sell your shares and take a small loss. If you are still confident in the stock, you now have the opportunity to buy more shares at a lower price. This is called 'averaging down'. You are reducing the average cost per share on your investment.
If the price returns to the level of your first buy, you are already in the green. If you had thrown all of your money in at once, you would only be even. A smart investor always leaves money aside for 'buying power', or "dry powder" as some call it. Averaging down can pull you out of some holes, but don't get too carried away. If things are looking bad, do not throw more money down the toilet, look for something else to trade and move on.
When should I sell my stock?
-Selling is a little more complicated. Now that you own the shares, your money is inherently at risk. Therefore, the less time you own them, the less risk. This is a simple concept, but to make money the price must go high enough to recover your trading commissions, and continue to rise to produce a profit. This is why we recommend having at least $500 to put into a stock. To recover your buy and sell commissions, the share price needs to rise at least 4% - assuming a commission of $10 per trade - a fairly easy gain to realize on a penny stock. On the flip side, consider only putting in $200. To recover the $20 in commissions the share price has to rise 10%. While this is definitely possible, it is less likely to happen quickly. As a result your risk factor is increased.
To continually make money trading penny stocks, TAKE PROFITS. If the price has risen 25% since you purchased, it is probably wise to consider selling. On a $500 position, 25% leaves you with over $100 in profit (including commission) and a rush of serotonin in your brain; leaving you feeling like you just won a nice poker hand. Not bad for a few clicks of your mouse right? Letting the stock run higher is a tempting option, but it is also a risky option. If the money is there for taking, grab it while you can! Otherwise you are risking your profit, and quite potentially your original investment. Trust us when we say that watching your money disappear is not the most uplifting experience.
NOTE: Not all penny stocks move as fast as others. It depends on the stock's share structure, how much money flow there is, how much dilution there may be, etc etc. Also, playing bigger penny stocks with more shares outstanding can be done with much larger positions, going for much smaller percentage gains.
Sometimes you might be in a stock that is running strong with relentless buying. This might be your chance to realize a much greater profit. If you are fortunate enough to experience this, congratulations. You have found a super hot stock before the herd! This is not an easy feat, and the excitement and profits are your reward. Even so, a smart trader should start looking to lighten his or her position around a 50% gain in this situation. If you hold out and find yourself on a 100% gain, selling half of your shares to secure the original capital is a good option if you want to stay in the play...
However, think of that risk meter climbing ever higher... You may miss out on potential profits by selling early, but remember that any profit is a good profit. Take it and move on to the next profit. Stocks that run like this will almost always go back down. Do NOT let your money vaporize before you because of your own greed. Also know that selling your shares on the upside is a piece of cake, but when a stock is heading down quickly it can be very difficult. Expect to only get the going bid or even less if everyone else is trying to sell with you. Sometimes it is worth while to place your limit order below the bid. This can often get a quicker fill at the bid, or if the bid drops, you don't have to go and drop your sell price; as this is a time consuming process in the heat of the moment.
Should I sell all my shares at once?
Quite often with penny stocks this is the easiest, and safest method to go with, particularly with fast moving stocks. Instead of keeping money in a volatile stock, you liquidate the asset and are left with cash. Cash is not going to disappear! You can then re-evaluate the situation from the other side of the fence and decide whether you want to try again with the same stock at a lower re-entry price, or move on to a whole new ball game.
In some cases, however, a partial sell can be a good strategy. If you find yourself in the position to recover your original investment by selling a portion of your shares, you could then keep the left over shares and see what happens. People call this riding "free shares". They get their original money back, and whatever they can get with what's left over is icing on the cake. If you truly believe, through some decent analysis, that the stock has potential to continue growing, riding freebies might be a great idea. If you have no idea what you own, or are taking the words of some people on a message board, however, sell it all and move on.
In the case of a longer term investment, and/or a large position in a stock, partial selling can be an almost necessary method. Referred to often as "scaling out", investors will sell chunks of their stock at different price levels or times. If the price action is slow and predictable, then slowly selling while the price creeps up can be much easier than trying to dump your shares all at once. In the case of having a lot of shares - in relation to the trading volume that is occurring - trying to sell all of them can be difficult, and could result in stalling the stock out, or even starting a decline (potentially before all of your shares are sold). For this reason selling a couple or more batches of shares can be a wise decision. This is another reason we only recommend buying about $500 worth of stock as a beginner. This amount should be easy to buy and sell in all but the most thinly traded penny stocks, stocks you stay away from in the first place...
Can charts help me?
Of course they can. Charts are not just for finding a good stock to trade. Most traders use charts to determine good entry and exit points as well. Charts describe the details of the trading action visually, and with a little knowledge one can use them to spot trends, determine 'support' and 'resistance' levels, and much more to help predict a stock's price movement. Please visit the Chart School at StockCharts.com to begin learning.
Where do I cut my losses?
Unfortunately, there comes a time for every trader when their money starts to disappear. No one can be 100% sure of a gain on every stock. Sometimes that "perfect stock" will surprise you by rearing its ugly head. If things do not look good, cut your loss and sell. Move on, period. The amount you let a stock drop is really up to you and your comfort level. Some people will let the price drop 10%, some 20% or more. You must determine how much you are willing to lose, and set a personal limit. By cutting you losses early, however, you reduce risk and are securing your money for the next trade.