| Chapter 2: Your Risk
Tolerance and Penny Stock Investing
Now before we get any further into penny stock investing, it is wise for
you to take into consideration at least some what you level of risk
tolerance. If you are new to investing, this is an important task to
learn simply because you need to understand just what you are up against
in this penny stock game.
What’s Risk?
Most people understand that a risk is something that is associated with
the amount of safety that something has. That is, if something is risky,
you have a good chance of failing at it. Now, that is not to say that
all investing is risky. All investing does have some risk to it, though.
Some stocks are safer than others because there is less likely to be
that opportunity for them to implode. Of course, it would be wonderful
if we could all invest in safer stocks and count on the money coming in
each and every month. Yet, the safer a stock is, the less likely it is
to have that huge windfall or to gain significantly.
That’s because of the company’s strategies. What makes a stock safer is
the fact that is it less volatile. There is not enough opportunity for
that stock to lose huge amounts of ground. With less ability to do that,
it is also less likely to gain substantial ground either.
Therefore, it is less likely to move up or down drastically when you are
investing in it. The bottom line is that the safer a stock is, the less
likely it is to offer you any risk but the less likely it is to offer
huge gains at the same time.
On the flip side, there is no doubt that a risky stock is just that,
risky. By saying that it is risky, that means that it is more likely
that the stock could lose ground. That is often because the company may
not be as stable but has good potential. It may be that the way that the
funds for that company are used is more potentially devastating.
Yet, even with this risk again comes the fact that with more risk there
is more opportunity to gain as well. Because there is such a risk, there
is also such an opportunity for substantial growth in the stock.
Therefore, those that are investing in these stocks do need to keep in
mind that there is a good deal of a chance that they could lose whatever
they put into them. On the flip side, though, the risk could pay off
with a substantial amount of benefit in the long run as well.
The Penny Stock Risk Factor
Before we talk about where you stand on the scale of risk, we need you
to realize that most if not all penny stocks are in fact risky business.
You have less of an opportunity to stay safe with these types of stocks.
Likewise, you have more of an ability to gain hugely than you would with
a safer stock. In many ways, it is an all or nothing type of situation.
The risk is there and is very real yet the benefits that could happen
could be very big at the same time.
No one doubts that any stock is risky in that you are taking your cash
and funds and putting them on the line. There have been very good stocks
that have gone very bad very fast. Yet, there have been very risky
stocks that have gone hugely successful at the same time. Therefore, we
now need to talk about you.
Your Risk Tolerance
As we mentioned, it is all up to you, now to determine what your risk
tolerance is. That means that you need to truly understand how much risk
you can handle. This will help you to understand if in fact the penny
stock is the right type of stock for you, specifically.
So, what’s your risk tolerance? To determine this, you need to take into
consideration how important the money that you are investing in means to
you.
• If you lose this investment, will you be okay as far as financially
speaking?
• If you lose this investment, is there a method for you to re-coop your
money?
• You should understand that investing in penny stocks means that you
should be able to right off your funds and not have to worry about them.
Sure, no one wants to lose their money, but if you can safely say that
it would be okay for your livelihood to lose it, then it is okay to
invest in it. Your risk level is much higher.
Those that have a risk tolerance that is higher are those that can
benefit the most from penny stocks. Those that have a lower risk level
should tread lightly in the way of penny stocks. Simply, you need to
know that it is okay with you to tap in and lose that money.
Even though you will do your best to insure that this does not happen,
you still need to insure that you can do okay if it should happen to
you.
Not the Same Risk?
If you know anything about the standard stock market, then you know that
the amount of risk that something carries is something that is defined
by several things. In fact, each stock can be seen from a different risk
vantage point from one lender to the next. Which type of investor are
you? In any case, what you need to consider is the fact that no two
stocks are the same.
With that said, you can assume that there are some penny stocks that are
less risky than others. You can also assume that there are things
including steps that you can take to insure that the penny stocks that
you are investing in are the safest types of penny stocks available. In
short, you need to insure that what you invest in has the risk tolerance
that you need.
The good news is that penny stocks do offer some flexibility in what
risk that they provide. You will learn in the next chapters more about
how to learn more about the stock so that you personally can judge the
amount of risk that plays a role in that stock.
So, to sum up, here is what you need to do to determine just what your
level of risk tolerance is.
1. Determine the amount of funds you plan to invest in penny stocks or
other stocks for that matter.
2. Determine just how important it is to your financial security to have
those funds.
3. Determine the amount of risk that you are personally okay with having
in stocks.
4. Work with your financial planner or advisor to determine if the
amount of risk is a wise decision for your own financial goals in the
long term and short term.
5. Determine what risk level you are comfortable with and the type of
penny stocks that fits those needs.
When you take the time to really work out what you financial risk
tolerance is, you will be better suited to selecting the right type of
stocks, penny stocks or otherwise, for you to invest in. There is no
wrong answer. Remember, everyone’s life and their financial abilities
are different than the next. Going broke will not help you financially.
The fact is that having the right combination of safety and risk is the
biggest factor in investing in penny stocks. You have to determine what
that combination is for you personally. |