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ENTREPRENEURS | 10/13/2011 @ 10:20AM |1,412 views
Secrets of Penny Stocks: Average Up

Penny stocks are a creature all their own, and as such, go by their own rules.

When you get involved with the 5% of penny stocks that are fundamentally solid, you stand to make tons of money in a short time. However, too many ill-informed investors buy the wrong ones in the first place, then exacerbate the problem with a common mistake.

After making a poor decision in the first place, they make things worse by averaging down. Throwing good money after bad.

Sure, after buying more of this dud, your average loss dropped from 40% to 20%. You don’t feel so bad now, right? But you’ve also doubled your bet on a sinking equity.

The problem is that falling stocks are most likely to keep falling. Rising stocks are most likely to keep rising. While true with Blue Chips, this is even more true with penny stocks, as many of them are either on their way to zero, or to 10 bucks.

Professional investors are much more likely to “Average Up,” by buying more of the same penny stock as it’s shares increase. The rising prices are often indicative of the operational success the penny stock is having, as their revenues, customer base, market share, and distribution network all expand.

If you find yourself thinking about averaging down, consider that most investors who take this approach end up losing. If you’re feeling brave, and want to trade like a pro, then averaging up on rising penny stocks will probably serve you very well.

If you know anyone who’s averaged down on a stock, send them this article – you’ll be helping them. And for those of you who are new to penny stocks, or new to investing, take a look at this free penny stocks learning site.



http://www.forbes.com/sites/peterleeds/2011/10/13/secrets-of-penny-stocks-average-up/