The 3 Most Dangerous Mistakes of Trading Penny Stocks

Why do so many traders lose money with penny stocks? Is it because they are uneducated, reckless or is it just a bad investment? I believe it is because they get over excited more than anything else. Getting yourself carried away and being sucked in the emotion of the trade is the main cause of failing at trading small cap and speculative stocks.

If you can find the courage to start trading small cap stocks you can learn the ins and outs of trading very quickly. Because trading penny stocks requires a relatively small investment to get started, it allows virtually and anyone the opportunity to do it. Some might say that it is not the best way to learn how to trade, but in principle the lessons are the same. The experience will be priceless and if you ever want to graduate to trading on the major exchanges this can be a great stepping stone for you.

Penny stocks are often seen as "easy money" and sold as a way to make "fast cash" trading cheap stocks. The truth however is that you can lose a lot of money really quickly - just like you can make a lot of money quickly. There are some great investment dangers when it comes to trading penny stocks. You have to be alert.

These are what I consider to be the 3 greatest dangers that you need to look out for when trading them.

1. Do some research and make sure you know exactly what you are buying
When you are trading the stocks of major companies like Yahoo, Microsoft or Merrill Lynch it gives you some sense of comfort knowing what you are buying.

When buying penny stocks you don't always have this benefit. In general the companies are far less reliable or even liquid for that matter. Most of them don't even have any products, services or revenues. They tend to be start-up companies looking for venture capital from people like you. Unfortunately, many of them never even get off the ground.

2. Emotions - fear and greed can ruin a trader
Many of the time the top traders in the world are those typical "stone cold" people who developed the ability to block out their emotions.

The lure of a massive profits off of a 10 cent stock can really take a hold of you in a very negative way. Most of us just get carried away and we get caught up in the desire and the dream without thinking clearly.

You need to always check in and keep your cool when trading. Always take some time to think about a trade before you do it. This will allow your emotions to calm down. Also, remember to never trade more than 20% of your trading capital on a single trade. Even if you do lose, at least you won't lose all of your hard earned trading money.

3. Tip-offs come a dime a dozen. Be careful
In the often over hyped world of penny stocks "hot tips" and "insider info" is a very common problem that we get confronted with daily.

We all want to make fast and easy money. We all seems to look for that secret that no one else knows about to give us the edge. Penny stocks tends to flourish on this tip-off culture - only to leave investors angry and in disbelief when their stock folds. Never trade on so-called tip offs and don't listen to novice traders pretending to know something.