Edge-ucation / Penny Stocks / Trading

The Art of Investing in Penny Stocks in 2021

  • Juwan's focus is on the intersection of investing and media. Simply defined as a creative with an appreciation for curating content that audiences can both learn from and enjoy. As a buy-and-hold investor, Juwan is a trend-spotter and likes to invest in companies at the ground level. As an avid believer of Web 3.0, his strategy consists of finding companies with a unique competitive advantage and interpreting their market sentiment within the retail audience.

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Penny stocks are widely known across the industry as the riskiest equities that you can own. They could be life-changing opportunities, or they could become your largest losses to date. The high-risk nature of penny stocks also comes with the possibility of high reward, especially when compared to blue chip stocks, ETFs, and other, safer options

The first step in minimizing the downside risk is learning how to invest in these companies and plainly put, it’s much more an art than a science. 

When investing in a micro-cap stock versus a blue-chip company, there are different approaches needed to succeed. By reducing your risk with the right due diligence and trading strategy, you can obtain the astronomical returns of small cap investments without exposing yourself to a lot of the downside potential. Only in the micro-cap world, have we been able to achieve 400% to 800% returns within a year, and sometimes even within the course of a few months. However, it can often take years of mistakes, emotional management, and effective research skills to be able to achieve returns like this so quickly.

We’re here to save you a few years on your venture capital journey.

Know What You Are Investing In

Many new investors get caught up in price action and catchy tickers, often losing sight of what the actual company is doing. Not only do you need to know the company, you also should verify that you are investing in a sector that has a strong presence in the public markets. For example, among the most popular sectors of 2020 were plant-based stocks, mushroom stocks, and biotech stocks. The more knowledge you obtain about the sectors your stock picks belong in, the more you will benefit and be able to effectively react to news releases, price changes, economic patterns and other various events.  
 
You may come across a hot stock that conducts business in an industry you aren’t familiar with. Don’t worry, you would be surprised at how far an hour on the internet can get you. Having the advantage of basic information regarding any sector of the market already puts you ahead of a majority of retail investors. Make sure to engage in research on sectors you are new to, before putting your dollars to work in that industry.

Your Micro-Cap Checklist

1. Management  –  The capability of the management behind the company is often overlooked, yet always crucial.  You want to have the sense that the team is able to carry the company through its goals and objectivesmaintain revenue projections, and make sure everything is going as planned. 

2. Cap Table  –  Considered the “financial statements of the small-cap world” – a cap table is a record of all previous equity financings done to date for the company. Unlike blue chip companies, the venture capital world is often known for issuing shares to the public pre-revenue, thus making financial statements less crucial to evaluation. This is part of the high risk, high reward nature. Knowing what price previous shares and stock options were issued at and what holding period they are subject to, is a huge indicator of how the stock will perform.  

3. Catalysts  –  Always be aware of impending events and economic changes  that may affect the stock you are interested in. For example, hearing the first whispers about Coronavirus in early 2020 turned many investors toward vaccine and healthcare stocks. Rumors of cannabis legalization that began as early as 2017 led to a price rally of new cannabisrelated stocks into the following year. Knowing how to analyze social trends, policy changes, and world events that will affect your company (for better or worse) can give you a winning edge on whether to buy, sell, or avoid a stock.

4. Company Fundamentals  –  Many companies have a great story and compelling, effective marketing. They may even have a few big names on the board of advisors. While good promotion is necessaryits even more important to analyze what the fundamentals of the company are. Some questions to ask yourself as you dig further in might be: What kind of innovative products or services does this company sell? What is their projected revenue? How are their profit margins? Are they in a highly competitive sector? Do they have a strategy to stand out from their competition?

For example, if you come across a new stock in a highly diluted sector, with products that are quite similar to what other companies offer, you may want to hold off from getting involved, until you can put together a comprehensive analysis about the company.

Play with Your Head, Not Your Heart 

The biggest obstacle in investing happens to be the least tangible one: Emotion. 

Seeing your hard-earned money fluctuate in value like a roller coaster can trigger all kinds of emotional responses. Therefore, highly risk averse investors simply park their money in an index fund that tracks the S&P 500 and never look back, accepting modest returns for the least amount of volatility possible 

Managing emotions is the most important step to successfully see returns in the venture capital world.

Understanding risk is the first step in minimizing it. By trading small-cap stocks, you must be ready for volatility as part of their nature. Being confident in the company’s fundamentals further empowers you to stay cool during period of volatile price change. As Warren Buffet once quoted, “If you can’t see your stock dip by 50% and stay calm, you should not own stocks.” If you truly believe in what you’re investing in, a reduction in price will be seen as a discount, which could even encourage you to buy more!

Diversifying is also incredibly important when it comes to this field of investing. The term “never put your eggs in one basket” definitely applies here. A good aspect of penny stocks is that the ones that succeed, often go tenfoldSo, by diversifying your small-cap investments into say, 10 stocks, the 8-9 that don’t move much, or even drop dramatically, will be more than compensated for by the 1-2 that hit a home run.

Another valuable tactic we encourage: know your exit price. What is your desired return? What price target do you have based on what you’ve researched? Don’t forget that there will always be penny stocks. There is never a shortage of emerging companies to invest in, so don’t hesitate to take profits when you‘ve met your investing goals. 

It’s easy as a new investor to get caught up in astronomical price targets projected with rocket emojis on chat rooms (that always seem to get higher and higher). It will prove wiser in the long term to take shares off the table when you are profitable. Selling half your position, selling your initial investment, or selling your profits are three super useful strategies in minimizing your losses and locking in profits when your stock is performing well. Selling too early can be as bad as holding too long, sselling partials when you’re in the green can help ease the blow from sudden price movements in an unexpected direction.

Learn from Fellow Investors

We wanted to find a way to help our audience connect with each other and make money together by sharing ideas… so we created a place to do just that. 

After many tests across different chat platforms, we selected Discord as home to the official Edge chat room. 

Come join our server, where we’re talking about the latest market trends, upcoming IPOs and sharing our collective knowledge. 

Use this link to join! 

  • Juwan's focus is on the intersection of investing and media. Simply defined as a creative with an appreciation for curating content that audiences can both learn from and enjoy. As a buy-and-hold investor, Juwan is a trend-spotter and likes to invest in companies at the ground level. As an avid believer of Web 3.0, his strategy consists of finding companies with a unique competitive advantage and interpreting their market sentiment within the retail audience.

    View all posts

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