10 tips to profit from penny shares

1. Do as much research as possible

Small companies may have shorter trading histories, but track down as much information as you can, and be sure to pick through at least the most recent set of accounts.

2. Treat tip sheets with scepticism

Some tipsters do an honest job; others are less scrupulous and clearly attempt to ramp bad companies. They should be avoided.

3. Go for quality

Buy the shares of companies with a reasonable trading history, which make money and can demonstrate some level of growth. Failing that, look for potential at the very least.

4. Avoid emotion

Becoming emotionally attached to a stock is one of the most common reasons why investors lose money on small-cap trades. Do not be disabled by blind faith.

5. Stick to a stop-loss system

It's never pleasant to lose money, but if a trade is going wrong, limit the damage. However, wide spreads and extreme volatility can make it tricky to execute.

For more information on penny stocks, read: Should you invest in penny shares?

6. Higher volume stocks are best

Trading tiny stocks with little, if any, volume can make it more difficult to close out positions.

7. Don't try and buy everything

There are hundreds of penny shares, but not all will be suitable for every investor. Stick to sectors or a particular type of company that you feel most comfortable with.

8. Never be afraid to sell

Knowing when to sell a share, large or small, is hard. Remember, it's never wrong to take a profit. Often, penny shares are short-term trades, too.

9. Avoid over-exposure

Penny shares should only ever make up a small percentage of an investor's overall portfolio. Over-exposure increases risk and ties up capital.

10. Don't bet the house

This is high-risk, high-reward stuff, and investors should never invest more than they can afford to lose.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.