Learning how to trade penny stocks
Penny stocks are small companies stocks traded on stock exchange at very low price. Though penny, these stocks are risky too due to many reasons like low market capitalization, more prone to scams, chances of getting de- listed from the stock exchange and its low trading volumes ensures high volatility in the stock price movement.
Although these are risky stocks, they remain to be liked by the investors and traders for both long and short term investment. These stocks tend to move irrespective of the stock market and investor/trader believes in stock’s individual growth story. Wherein big company shares or blue chip stocks move according to market and give nominal returns; the penny stocks have the ability to give multiple returns and that too in very short term to an investor.
This potential of generating high returns and certain other advantages makes an investor feel attracted towards investing into these small company penny stocks.
Below are some of the notable advantages trading into these penny stocks, these are:
- Higher profit Potential: As discussed, the biggest advantage for an investor to trade penny stocks is its ability to provide higher profit compared to blue chip stocks. The penny stocks are small company stocks whose business is small and have good growth potential. A positive business growth can make stock price double or even triple also.Many penny stocks from past have become today’s blue chip stock and that is the power of penny stocks.
- Higher Profits in Short Term: It becomes more advantageous for an investor when huge profits are made and that too in very short term of investment and penny stocks are best example. These small companies have tremendous growth story compared to big companies. A business growth seen or even projected for future is enough for these penny stocks to go rocket to may even get double or triple in just a matter of few months.
- Quality Penny Stocks outperform Blue Chips: Over the decades, it has been seen that quality penny stocks outperform the blue chips. This is for a very simple reason that the penny stock’s small companies are small but growing and have potential to become a big company, but whereas blue chip’s big companies are matured and can only give nominal returns in business.
- Easy to Buy: Penny stocks are very easy to buy and sell as these are very common shares and are easily available in the market for general public. It’s low price ensure an investor to buy in huge quantity and also enables him to diversify his portfolio into other penny stocks without considering much about the investment cost.
- Capped Downward Risk & Unlimited Profits: An Investor or trader will feel much happy ad comfortable if he knows his maximum downward risk. Investment in penny stocks ensures investor about the risk as his downward risk is capped. A stock if get beaten down can maximum become zero but not negative and have no limit on upside. A penny stock trading at $3, caps a maximum loss of $3 per share to an investor but benefits with no limits on upside. It ensures limited risk and unlimited profits. Micro cap stocks are volatile, but still give profits to many people.
- Best penny Stocks are mostly Undervalued: If we analyze the blue chip stocks, most of the cases the current stock price will be trading more than its fair value or trading in multiples to its PE. But the best penny stocks trades at even less than its fair value or PE. This happen for just a reason that they lack investor interest and knowledge among of small investor. If analyzed, these undervalued penny stocks are future blue chips and gems for investors.
- No Long Term Investment: These penny stocks are volatile and tend to get multiply in just matter of few days or months. Short term growth ensures no longer term investment commitment for an investor into these stocks.
- Small Investment: Trading or investing in penny stocks doesn’t burden investor with huge funds requirement as in case of buying the blue chip stocks. Penny stocks are small priced stocks which require very less investment. Naturally, if the stock price is less, larger number of shares can be purchased and that too with small investment.
- Sweetest penny Stocks Fly under Radar: There is seldom any news seen on televisions or an analyst report on these penny stocks. These sweetest penny stocks fly under radar and go unnoticed to masses. A best pick of penny stock with good and quality analyses ensures buying at a low price and ultimately higher returns.
There are many paid research companies who have been recommending some quality penny stocks and have consistent history of picking the winners.
Penny Stocks – Rules for Investing
Here are some rules for traders and investors for trading penny stocks. These are:
- Never invest more than what you can lose: Though the penny stocks have potential to provide huge profits but is coupled with huge risk too, as they are highly volatile and low traded stocks. These stocks can get delisted even and ruin whole investment. So, investors are advised to never invest more than what he can afford to lose.
- Track Everything Closely: Being unpopular stocks, the information is not easily available on news channels and nor there is any analyst report available. Your investment into these scary penny stocks needs cautious approach. Investor must track everything about financials, company’s business, promoter’s stake in company and its business guidance etc.
- Analyze Trading Volumes: Investor is advised to study and stock’s trading volumes and also to analyze its volume consistency. There can be instances like block deal in the stock on one day of week and other days there is no volume, so the average weekly volume will be comfortable but there is a huge risk as there is no consistency.
- Don’t listen to Promoters: Penny stocks promoters have a bad image of creating pumping and dumping schemes. Artificial positive news pumps up the stock price and dumps their holding at high price. It is advised that investor must get the promoter statement authenticated before investing. The investors should imply their own mind and experience to seek out for the most profitable solutions.
Penny Stocks – Rules for Investing (part 2)
- Get out of stock When it’s not trading your way: It is easy to understand this rule but very difficult to implement as no investor like to book loss on his investment. This rule says that investor or trader need to use stop loss till what he can bear easily as holding the stock for long in spite its continuous fall can ruin whole investment even.
- Able to go both long and Short: Going long is when you feel positive about stock and you buy the same and sell on rise. Short is opposite to it, where trader sell the stock first in anticipation of fall in stock price and later buy the same at lower price. The trader must have the ability to make money or profits by both shorting and going long on stock.
- Never Love the Stock: Another important rule is investor must not love the stock. Most of the times investors fall in love with a stock that is giving him good profits and don’t sell the same even after getting his target price. These penny stocks have tendency to rise sharply and then can also fall more briskly, ruining whole profits of investor. So never love and hold the penny stock, but book your profit.
- Focus on risk Reward: It is advised to use stop loss while investing into these risky penny stocks.. It is advised to focus on risk reward for stop loss. For instance if an investor buys penny stock at 3$ per share and keeps a target sell price at 4$, so the stop loss should be at $2.8 in order to get favorable risk reward ratio of 5:1. It can be 4:1 or 3:1; in short the profit must be more than the risk involved. you can read Penny Stock investing rules part 1 by clicking here
Tips to Pick Penny Stocks Newsletter
Alongside huge risk in penny stocks, the stock chosen wisely they also have potential to give huge returns to investor. Sometimes, the returns can be so massive that it can double or triple the investment in just a matter of few months.
The most important aspect in this is how to choose that profitable stock. On an average only one out of 100 penny stocks become a gem and rest just a nightmare for an investor.
An important source of material for analyzing penny stocks is the newsletter. But the same must be an authentic. Here are few tips to pick the best newsletter. These are as below:
- Previous years Performance: The newsletter should provide their past performance chart, indicating all the hits and misses with details like date of date of recommendation, recommended price with target and the result achievement. An investor must analyze its authenticity before evaluating.
- Reasons for choosing the stock: The newsletter instead of showing only the numbers but also the information that demonstrated their stock pick to be worthy of passing it to their members. Not only the profit and loss figure also information on important determinants need to be mentioned like Business, Promoters financials etc.
- No Vested Interest: It must be analyzed carefully that the newsletter owner or moderator must not have any vested interest into their stock tips. Penny stocks often are prone to pump and dump schemes wherein these stocks are artificially brought into limelight of small investors for ultimately dumping the same at much higher levels.
Tips to Pick Penny Stocks Newsletter (Part 2)
These are as below:
- Monitoring the Portfolio: This is a very import aspect, wherein an investor wants that his portfolio must get monitored constantly. The newsletter must be efficient enough to back up the buying of an investor by constantly monitoring the stock price and advise accordingly. It is as important to know when to sell the stock as to know when to buy.
- Details on Subscription: The newsletter must let know the subscriber about details of subscription like they should tell how many picks they can expect to get over their subscription period and also about the timings of the same. It is important to know it as investor must be prepared for his investment.
- Customization: The newsletter must have a customization aspect. Subscriber must see that the newsletter should have information and efficient enough guide to all types of investors. It is also to know whether they have a customer support as penny stock movement is very precarious as investor need advices from time to time.
- Information on Brokers: Alongside guiding for stocks, newsletters should also give information on brokers. A choice of a right broker is also very important as that of choosing the right stock. Most of the investors do not have much start up investment and the newsletter guides in picking the right broker who provide low cost per trade and also gives fair trade to his client.
- Information on Buying Order: The newsletter should also guide about placing the order of the investor. They should guide him regarding the limit and market order. The penny stocks are too volatile and low traded stocks, lack of information and cautious on placing the order may end up investor to buy at premium and sell the same at a discount.you can read Tips to Pick Penny Stocks Newsletter part 1 by clicking here
Penny stocks are the low-priced stocks having a share value of less than $1. The beginner investors undertake these stocks as the bulk stocks which could be purchased at low prices. The extremely low prices of the stocks allow the investors to hold thousands of shares with a lower amount of investment. The gain of a few cents per share can even result in higher returns in terms of percentage. Also, the losses can also be higher with the lowering down of the prices of stocks. Penny stocks are highly speculative and are considered to be highly risky for the lower liquidity levels and a small market capitalization of the associated companies. We also recommend checking out our free training.
SEC (Securities and Exchange Commission) defines penny stocks as a stock of the micro-cap company trading lesser than $5 per share. There is a chance that the company is new and requires market share or it might be close to bankruptcy. These stocks are dissimilar to blue-chip stocks and are not traded on the major market exchanges. The stocks less than $1 are delisted by Nasdaq rule. The people interested in trading penny stocks move towards OTC market groups for trading.
Keep points to keep in mind when learning how to invest in penny stocks
Narrow down the trade list
You need to understand where the penny stocks need to be traded. You can use the stock screening tools and check out the stocks under $1 pricing. It will be easy to pick up the right stocks from the list of penny stocks.
Open an account
There are many things included in the trading account, including the transferring of funds, fee and customer service. Take your time to shop around and choose the broker meeting all the requirements in the right way. Penny stock investors need to check out the fee structure of the commissions on a per-share basis. This is quite suitable for long-term investors looking for the purchase of a low number of shares. For day traders, there are other options available which could be lucrative for the investors who trade on penny stocks.
Understand the risks
It is very important to understand the risks involved in penny stocks. The associated companies having penny stocks have lower liquidity levels and are highly volatile. Hence, it is important for the traders to make enough research before making an investment.
Investing in penny stocks
Investing in penny stocks can bring substantial rewards, and the risk is low enough for anyone to become a stock trader. These tips will help investors become more successful in trading penny stocks.
Look for Companies that can Make a Profit
If the company has made a profit or is making a profit now, that’s a good sign. Startup companies often operate at a loss but don’t assume that will change. Look at the causes of the losses. Why is this company losing money? Will they be able to recover on their own? If they have to seek additional financing, that will dilute your shares, and a joint partnership may give control or financial advantage to the other company. Avoid situations where the company does not look poised to become profitable. These are definitely not awesome penny stocks.
Understand that these are penny stocks, and there’s a reason for that. Don’t expect to discover the next Coca-Cola or Wal-Mart. Know what penny stocks are and what is reasonable to expect. Awesome penny stocks can be a good investment, but it’s important to keep their nature in mind.
Look at Liquidity
You want to see a consistently high volume in trading. The average may not be very enlightening because a large volume Monday but no trading for six days could still yield a deceptively large weekly average trading volume. Also, make sure that the trades are not all from one insider. You don’t want to end up dead money that you’ll have to dump at the bid for a lower selling price. You want awesome penny stocks with great volume and returns.
Have a Plan and Follow that Plan
Most penny stocks are not stable. They move quickly in either direction and if you’re not careful with your investments, you can quickly end up running out of money when a stock drops quickly. Remember, if a stock costs $0.10, a decline of only $0.02 is a 20% loss. Move on when you get stopped out. Don’t be tempted.
Know Your Source
Many penny stock investors get their stock information from email newsletters. This is not necessarily a bad thing. There are great newsletters out there. However, others are nothing but pump and dump schemes. Before trusting any source, subscribe to the newsletter and track the investments it recommends. After a short time, you’ll be able to tell whether the newsletter is giving good information about awesome penny stocks with a legitimate opportunity to make money.
Penny stocks are a good investment when done right, and investing in awesome penny stocks is enjoyable. The volatility of the stocks adds to the fun of trading. An investor armed with these tips for doing well in penny stocks will be much more successful. As a byproduct, penny stock trading will be more fun, because success is always more enjoyable than the alternative.
The investment in penny stocks requires cautiousness. In most of the cases, these small-cap stocks are susceptible to becoming highly volatile. If you are sure that you’ve understood the risks associated with these stocks, it will be easy to proceed. Stock screeners can help in getting the narrowed listing of the stocks which meets your trading pattern, niche choice and the tolerance of risk. There is a different answer for every stock trader for investing in penny stocks. Make sure that you understand the stocks before investing and choose the right stocks by making the appropriate moves. It is essential to get the penny stocks screening before making the right choice for your investments.