I wish someone told me before I bought my first penny stock (Lessons from a few hard knocks)

# Hey everyone,

I wanted to go over a few things that I've learned over the years trading penny stocks. I thought that I had discovered a cheat code to make me a lot of money at the start. It was easy to see that if it wasn't for a solid strategy, these stocks would deplete your portfolio quicker than you could refresh!

If you are interested in entering this field, or if you are already in it, but still have trouble getting things consistent, there are the real world factors that you'll need to take a look at; lessons I had to learn the hard way.

**1 Daily Volume is Your Lifeline (Liquidity).**

I first saw this little biotech at $0.05. The chart was just about to "pop. I purchased and it increased by 40% and I thought I was a genius. After that I headed for my first job, which was selling.

Nothing happened. My order just simply lay there.

I was not aware that the shares of this stock only traded a few thousand a day. It was truly a no man's land for buyers. I had to cut my price, and cut it ever lower, to come out, losing all my "gains" and more.

The Rule: Only purchase a stock that has a significant amount of daily trading (500K - 1 million shares traded per day). When no one is buying – YOU'RE TRAPPED! One end is easy to get into, the other is the hard end to get out of.

**2 The Share Structure (Dilution Machine)**

It's important to examine the share structure, which includes the Authorized Shares (AS) and the Outstanding Shares (OS).

Many penny stocks continue to exist because they are issuing new shares to cover the bills. This is known as dilution. The more that a company issues new shares to finance its operations, the smaller a stake you'll own in the company, and the price of the stock will decline.

The lesson: Do their most recent filings before purchase. But if the shares are growing rapidly from month to month, get out of the market. You're simply paying your employee's salary and using your money for nothing.

**3 "The Story" vs. A reality check on the boom (Sifting Through the Hype)**

Penny stock companies know how to market like the back of their hands. They will issue press releases that are revolutionary, "Entering the AI market", "Secured a massive distribution partnership" or "On the verge of a medical breakthrough.

I was always into the hype the whole time. Then I began to look at their financial statements (10-K or 10-Q). One-half of the time, these “revolutionary” companies were up to $4,000 in the bank, and millions in debt.

The concept of the day is to not sell the story, sell the price action. Beware of all press releases! Compare the numbers. Could they afford to make it through the next 6 months in the budget they have? Otherwise, it's likely that a large share dilution or reverse split is just down the road.

**4 Know who you are up against (Promoters)**

When a penny stock is hyped by a large volume of penny stock accounts on Twitter/X, Discord, or TikTok that are all talking about it at the same time, it's probably a Pump and Dump.

Insiders and early buyers fuel the price with their buys, pay the “influencers” or use alerts, and sell to retail investors who are chasing the green candles.

The lesson: If you hear about a penny stock that's just 80 percent or more up, it's most likely too late. You are their means of liquidity to get out. FOMO (Fear Of Missing Out) should not be the basis for your trades.

**5 Position Sizing (The “Casino” Rule)**

I invested half of all the money that I had in my account to a triple zero stock that I knew was going to be a dollar in my first year. This was suspended by the SEC a week later. Total loss.

Penny stocks are more like poker or blackjack than investing in traditional stocks. A risk management approach is required like a casino manager.

The Rule: Only invest in a single penny stock up to 2% – 5% of ones total investments. Suppose that all of the capital you invested in one of these micro-cap stocks may disappear overnight. When night time sleep is lost due to a 20% drop, you are trading too large a position size.