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Ten simple rules for maximising your penny share profits

Maximise your penny share profits by following these ten simple rules from small-cap expert David Thornton.

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It is one thing to identify good penny shares, but trading them is no less a challenge.

Let's accept the harsh reality: It's virtually impossible to get into shares at the lowest price and get out at the very top every time.

But by following ten simple rules you can ensure you maximise your penny share profits.

Here's a ten-point checklist.

1: Dip your toe in the water

When I buy a share for the first time, I often start by making a small investment perhaps no more than a half of what I might eventually hold. This initial purchase has a psychological effect. Once you hold a share, in whatever quantity, you become sensitive to the factors that affect its progress.

As time goes by you start to build confidence in your initial view, or else you start to doubt it. As you confidence builds you can add to your initial holding until you have enough. The important thing there, though, is that your judgement should be set by the progress of the business itself and not by the share price. This brings me to

2: Don't be scared by a falling share price

If the price of a share that you hold starts to slide, then you should ask why. It may mean that the company has problems, and you might be able to work out what these are. Read the company's announcements closely, look at the language being used. Maybe you can 'read between the lines' and sense that all isn't well.

But share prices can go up and down for reasons that have no connection with the underlying progress of the company.

Some of the most successful sharesI haveever tipped, such asOptimal Payments, Tanfield and Gulf Keystone Petroleum, dipped below the initial recommendation and stayed there for some months. But then they started to fly.

A falling share price can be a misleading signal, so sometimes there is no need to get too concerned.

3: Stick to BUY Limits

It is all too easy to watch a share price rising, feel desperate to get on board, and then find that you have paid top dollar. Stick to your predetermined buy limit.

4: Selling is no different to buying

When it comes to selling, you should also set a limit. Your limit may simply be the bid price quoted at the time. But remember that at the moment you want to sell you are effectively in a negotiation with the person who is going to buy your shares from you. Do not be weak and accept a low price. Set a limit, stick to it, and do not lower the price that you are prepared to accept in too much of a hurry.

5: Don't set stop-losses

A stop-loss is designed to prevent a small loss from turning into a large one. For example, if you buy a share at 10p, you determine that if it falls to 7p you will sell come what may, so that the worst that can happen is a 30% loss. That is all very well but if you sell out at 7p you are most unlikely to buy back in at, say, 5p, and enjoy the subsequent move upwards.

Some investors prefer to use stop-losses, as they can offer protection against big share price drops. However, to my mind stop losses simply reveal that you do not trust your fundamental assessment of the company. If you think shares are cheap at 10p, then why sell them just because the price has fallen to 7p?

6: Don't be afraid to bank some profits

If we buy a share at 10p it is because we think it will go to, say, 30p. If the share price then moves to 25p we might still have 30p as a target, and yet it still makes sense to sell at least some of our shares and bank some profit.

We can never be entirely sure what lies around the next corner, and at 25p the shares are clearly not as undervalued as they were at 10p, unless of course the situation of the company has fundamentally changed.

7: Check trading volumes

In the statistical table in every Red Hot Penny Shares tip you'll see normal market size'. For example, for one share it's 15,000. For another, it's 5,000. This indicates the minimum number of shares that you can trade at the quoted bid/offer price.

To trade in a larger quantity, look at the average trading volumes. For instance, go to Yahoo Finance and look up your chosen share. There you'll see the average daily trading volume. The greater this number is, the easier it should be to deal in a large number of shares.

8: Keep your portfolio in balance

Suppose you have £10,000 to invest and you decide to split it equally between tenshares. Then one of them share A' goes up six-fold, while the others stay where they are. So you then have £1,000 invested in each of nine shares, and £6,000 in share A'. The latter now represents 40% of the value of your portfolio. At this point, ask yourself if you really want to have 40% of your money in share A', which has already done so well. Just from the point of view of sensible risk management it would make sense to sell some of your shares in A' and add to your other positions.

Remember that you should never have too many eggs in the same basket.

9: Don't over-trade

Every time you buy or sell a share it costs you money. There's broker's commission, stamp duty (though this no longer applies on Aim), and the bid-offer spread. So don't trade more than you have to. Only do so if there is a really compelling reason.

10: Don't expect to get everything right

Not every share purchase you make will turn out well. So if you have to take a loss, don't worry about it. It happens to even the most successful investor; it's just an inevitable consequence of playing the game. All that counts is that, over time, your profits outweigh your losses.

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