Penny stocks are lower-cost, high-risk investments, usually trading below $5 per share. These stocks are priced significantly low for various reasons. For instance, they might be coming for a once large company, now on the verge of bankruptcy, or a start-up company yet to meet the criteria to start making large exchanges. Other companies might need to de-list huge exchanges and start trading OTC (Over the counter). Sure, some penny stocks might still be listed on the Nasdaq or NYSE. However, most exchanges are done over the counter or via the electronic OTCBB (OTC Bulletin Board) system.
Can you Make Money with Penny Stocks?
Some traders consider penny stocks a quick and easy way of making money and getting rich even with the risks involved. Well, some penny stocks are incredible stocks that got devalued for various unfortunate reasons and have great potential for rebound. However, always remember that the stock prices do not reflect the company’s performance and quality. There are numerous factors to consider, including the number of shares available, outstanding shares, share liquidity, risk of dilution, and so on.
Tips when Investing in Penny Stocks
Only Invest the Amount of Money you are Willing to Lose
Even with the earning capability, investing in penny stocks is quite risky. It is, therefore, crucial that you only invest the number of dollars you can afford and are willing to lose and strictly gamble with that. If anything goes wrong and your investment goes under, you will save yourself from financial trouble.
Do Not Be Greedy
You can lose your 30%- 40% return just as fast as you made it. Always pay attention and remember that things at the penny stock market can change in a blink of an eye. If you are too slow to react to these changes, you might be left selling your position to cover your loss. Take the gains (no matter how little) and carry on.
Extensive Research is Key!
Once you find your ultimate trading company, do not blindly dive into investing with them. Whether you invest in ABC’s company or solar penny stocks, take some time to track them and get a clearer picture of how the stock price moves. Unfortunately, most investors depend solely on the information provided by the stock promoters or the company itself, making them easy prey to fraudsters and fraudulent schemes. Visit the company website and check out the feedback and reviews from their clients. If you cannot get clear, verifiable, and reliable information from third parties, this is a major red flag of a pump-and-dump fraudulent scheme. Pay attention to the following factors to consider when choosing the penny stock company to invest with:
- Verifiable Financial Reports: Financial transparency is vital. Your prospective penny stock exchange should always have reliable and verifiable financial reports available to the public. They should also provide you with a reasonable and effective growth strategy.
- A Strong Financial Position: Go for operational companies that are regularly audited. Your prospective stock company should also have some assets and cash at hand.
- High Liquidity: Invest in stocks with high trade volumes as they are easy to sell.
Usually, companies that trade penny stocks are small, with small market capitalizations. However, this is not always the case. When it comes to penny stock trading, it is crucial to evaluate the company’s strengths and fundamentals. Does the company depend on trading new stocks to rain money? Can the company compete effectively in its sector? Is the company profitable? Can it make enough money based on its current performance and business structure? Good investors must be good researchers, especially when investing on such risky grounds. If you take your time, you will find the gems that meet (or surpass) these criteria.