Penny stocks are great for trading. But did you know that investing in penny stocks can also give great returns? It’s true! By starting small, you can ‘make it big’ with penny stock investing.

Now, before you start investing in penny stocks, these are some important rules from expert investors for successful investing in penny stocks.

#1 Diversify Your Holdings

Always make sure that you never put all of your money on a single penny stock. Remember that picking the perfect penny stock to invest in is impossible for even the most experienced and expert investor. There is always the possibility that the stock price would decline due to numerous external factors or internal company factors. No one can predict the future of the stock with 100% accuracy.

The point is, any successful investing plan needs diversification. You can aim for a portfolio of around 5 to 20 stocks.

#2 Check Earnings of Stock

Do not buy a penny stock with negative earnings. Remember that if a company consistently loses money, it is a huge red flag. 

The research reports on stock market bankruptcies show that negative earnings are the most shared attribute for what causes bankruptcies.

To know whether the penny stock has negative earnings, check if its P/E shows a negative (–) sign. It is best to avoid investing in such penny stocks, no matter how good the prospects might appear to be!

#3 Look for Stocks that pay Dividend

In order to reduce the overall risk exposure of a penny stock portfolio, it is best to invest in dividend-paying penny stocks.

Although most penny stocks do not pay dividends due to their small market capitalization and revenues, there are also penny stocks that pay dividends. 

The penny stock companies that pay a dividend are the ones who care to attract sensible investors who want to make money. Investing in penny stocks that pay a dividend is one of the best ways of creating wealth. 

Thanks to the magic of compounding interest, a long-term investment in penny stocks with dividends will be able to give you a neat profit!

#4 Always Have a Trailing Stop

One of the major problem encountered by investors is not knowing when to sell. But by having a trailing stop, this problem can be effectively solved.

The advantage of having a trailing stop is two-fold. It allows your winning trades to earn more profits while cutting your losses short. By using trailing stop loss, you will be able to participate in most of a stock’s gains as well as protect your downside.

Typically, expert investors use 15% to 25% trailing stop to ensure that it is not hit during any swings in prices. 

#5 Nothing Beats Research

To be successful in penny stock investing, you would need to perform dedicated research like you would do for regular stocks. 

You must enroll in good penny stock courses taught by mentors who actually know the ins-and-outs of the stock market. Be it the various ratios of the stock, or the technical analysis of the chart, or the latest breaking news and development about the stock, you would need to be armed with the necessary knowledge to become a successful penny stock investor.