One reason why investors invest in penny stocks is that they hope their small capital will buy tons of these stocks and these stocks will yield 10 times of their profit. Well, probabilistically speaking, that’s not entirely impossible. Some penny stocks turn out to be good investments.

However, penny stocks carry high risks in general, and you will need careful speculation to make your penny stock dream come true.

With that in mind, here are five common mistakes that penny stock investors should avoid:

Mistake No.1: Doing Insufficient Research

Many penny stocks trade cheap for a reason. For example, they could be struggling financially, facing legal trouble or reeling from a scandal. But there are also penny stocks with great potential. Identifying these good investments needs detailed research on the companies’ fundamentals.

Mistake No.2: Blindly Following Recommendations

Relying solely on recommendations from those who don’t know your personal financial situation, whether from friends, family, or social media sources, is not wise at all when investing in penny stocks. Penny stock market can be volatile wildly over a very short time, so recommendations may not apply to the current market condition.

Mistake No.3: Letting Emotions Drive Decisions

An investor ruled by emotions is likely to buy and sell shares at the wrong time. Never let emotions guide your investment decisions. Instead, you should develop a trading strategy and stick to it.

Mistake No.4: Lack of Portfolio Diversification

Typically, penny stocks are more volatile than blue-chip stocks. Putting all the money in the penny stock market can expose your portfolio to unnecessary risk. By using your brokerage account to buy stocks of larger companies or even instruments across different asset classes, such as forex, indices and funds, you take on less risk and potentially enhance long-term portfolio stability.

Mistake No.5: Holding onto Losses

Refusing to cut losses and holding onto underperforming investments in the hope of a rebound can be a huge error in penny stock markets. That’s because penny stock is a short-term investment, meaning investors rely on quick price movements to make a profit. There’s little point in trying to endure temporary market slumps. Setting a stop-loss order on your investment can help you out.