Posted by Peter Leeds on August 8, 2013 Leave A Comment

Any stocks can bounce around in price. In fact, they all do. Your job when investing is to distinguish which price moves you should pay attention to, and which you should ignore. This is one of the secrets to investing well, and gains paramount importance in relation to investing in penny stocks and highly volatile small stocks.

At first, this may sound like common sense, and certainly it appears quite easy, but you might be surprised at how often investors make the wrong move. They sell the wrong stocks, and hold on to the wrong ones, with the end result being a gradual (or rapid) deterioration of their investment dollars.

What may help you as an investor is to learn to distinguish between market risk and company risk. If stocks are falling in sympathy with an overall down market, then you can assume that the weakness in your stocks is based on the market, and not necessarily on any problem or issue with your particular investment. Just as they fell when the market fell, they are likely to rise when the market rises. Any stock trading in sympathy will probably continue to trade in sympathy. In this case, stock market investors who get spooked out of the shares by the drop will be much more likely to sell a stock that pops back up pretty quickly when the market rebounds.

The type of stock to be more concerned with is the one that falls independent of any market activity. Especially when the averages and most shares are on the rise, if your specific stock is heading south it probably indicates a more serious problem with the stock. You can relax when your favorite stock is trading in line with the overall market, or even better than the overall market, but when it goes against the grain and trades lower despite a rising stock market then you need to consider your escape options. At very least, figure out the reason for the share price weakness and act accordingly.

The best investing results in penny stocks come from those traders who understand the difference between market risk and company risk. Reacting properly to company risk, while not actually reacting at all to market risk, can help any traders to bring home better stock investing results.

While this fact is true among larger stocks and blue chips, it becomes even more important in relation to investing in penny stocks. Since these smaller stocks can often twist in the wind, and small events can have major impacts, you will need to develop your ability to differentiate between market risk and company risk when investing in penny stocks.