You have probably heard about how amazing of an opportunity penny stocks can be, but is it really a good way to trade?
Like any stock market trading strategy, there are certain risks to be aware of with penny stocks, but they can be very profitable if done correctly.
It is important to have a full understanding of exactly what penny stocks are, the risks of penny stocks and how to develop a successful strategy before beginning to trade penny stocks.
The following is a guide to what penny stocks are and how they can churn huge profits when traded properly.
What Are Penny Stocks?
Penny stocks are shares of a company that can be purchased at very low prices. The exact amount of what constitutes as a penny stock varies, but most commonly anything under $5.00 per share is considered to be a penny stock.
Penny stocks are usually much riskier than more valuable stocks as you are essentially investing into a company that has not become highly profitable for themselves yet, which means they carry a higher chance of not succeeding in the future. However, the risk is also lower in the sense that it does not take as much to invest into a penny stock, and you do not need the company to become very successful in the market to drive a profit.
Also, since penny stocks are regulated and watched over far less, they carry the risk of being a scam designed to trick inexperienced investors.
Penny stocks can at times be challenging to find and trade, and it may require a broker in order to buy and sell the penny stocks you are interested in the most.
How Penny Stocks Work
Trading penny stock involves purchasing a large number of shares in a company with less success rather than purchasing fewer shares in a company with a higher value.
The first step to trading penny stocks (as is the case with any good trading strategy) is to research and find the best penny stocks to trade. In order to do so, you should be well informed of the market as a whole, as well as the strength of the industry that the stock being considered is a part of.
After determining the best penny stocks to trade, you then purchase the desired number of the shares of the stock, or have your broker purchase the shares decided upon. After purchase, the value in the stock is either going to rise or fall, and the higher the stock increases, the more you are going to make when it comes time to sell.
Many penny stock investors do not like to stay too long in a penny stock and sell early, which is certainly not a bad strategy. When successful, penny stocks can yield as much as a 1,000% profit in as little as a month, although finding the right stocks takes skill, expertise and perhaps a little trial and error.
Are Penny Stocks Profitable?
As mentioned, penny stocks carry huge potential, allowing investors to make significant gains very quickly when a company they invest in suddenly becomes very popular.
However, hoping to strike big on a single penny stock is often not a good strategy to utilize. Instead, it is best to focus on constant, smaller gains when trading penny stocks.
One of the main reasons it is best to sell early after generating a profit with a penny stock is to avoid being a victim of a pump and dump scheme(see below), but a penny stock can suddenly drop in value despite recent success for a number of reasons.
Overall, penny stocks can be incredibly valuable over the long term, while also carrying a potential to hit big at any moment. There are certain risks to be fully aware of and tips to follow if you want to give yourself a good chance at being successful. However, there is no doubt that penny stocks can be a great way to trade, and many people are already making a lot of money each month from trading penny stocks.
Risks of Penny Stocks
Penny stocks inherently carry risk. After all, you are essentially giving money to a company that has not proven to generate large profits consistently for themselves, let alone help make you money. Subsequently, the biggest risk to be aware of with penny stocks is the fact that failure is going to happen from time to time, and even the best penny stock strategies that are able to generate large amounts of profit often involve some losses along the way.
Another risk to be aware of is that there is simply less activity that occurs with penny stocks, which means finding stocks to buy and sell can be more challenging. In the event you do generate a profit, it may require the help of a broker to sell the stock.
Perhaps the most concerning risk of penny stocks, however, is the amount of scams that exist. The most popular scam to be aware of with penny stocks is what is known as a pump and dump scheme, which is where investors pour money into a stock, put out misleading information to get investors to also invest and then suddenly pull their investment as soon as it becomes profitable, leaving the investors in a difficult situation. To learn more about the risks of penny stocks, click here.
Tips for Trading Penny Stocks
While the risks may scare many off, the fact is it should not keep you from trading penny stocks. Penny stocks can be very profitable as long as the appropriate precautions are put into place and the trading strategy is sound.
In order to give yourself the best chance at being profitable with penny stocks, try these penny stock tips:
- Focus on high volume
- Know each business
- Conduct thorough research
- Diversify your investments
- Think rationally, not emotionally
- Sell quicker than others
By knowing each business you invest in well and staying ahead of the game at all times, penny stocks can churn huge profits and be a long term investment strategy.
If you have had any success trading in penny stocks, leave a comment and share your experience in the section below.