Penny stocks are a share in a company that trades for less than $5. These stocks are often seen as being an attractive investment opportunity as they are more volatile and therefore can increase greatly in price in a short amount of time. They also require less initial investment and so may be more appealing to beginners in trading who do not have a large amount of funds available to them.
However this volatility also makes penny stock trading a high risk trading option and combined with lack of company history and safety standards compared to other stock options means that they are not often a recommended option for cautious traders. However with experience and research they can be highly profitable for traders who know what they are doing. Looking for a penny stock tip or two? Then read on.
Get started trading penny stocks
First, be aware that penny stocks are low value for a reason. Perhaps the company is new or in the worst case scenario, they could be almost bankrupt. It is important to be realistic about the potential of stocks that you are considering buying and do as much research as you can about the company. It is easy to be tempted to buy stocks for such a low initial investment but try to be cautious and only buy stocks when you are fully aware of the situation that the company is in.
You should also look at the volume of shares that are being traded which can give you a better ideaof their real value. Look for a consistent volume of trading from day to day – a low volume is not a good thing as you will probably find it difficult to sell the shares later and also an inconsistent rate of buying and selling can indicate potential problems within the company.
Make sure that you always have a plan of when to sell your stock and resist the temptation to hold on to it if the price seems to be increasing more. Due to the volatility of this type of stock, increases in value are likely to not last for long. If you hold out for a higher share price then you run the risk of the value dropping dramatically and losing your money. The key to trading successfully in penny stocks is to make your profit quickly and move on to the next opportunity – save longer term investments for less volatile trading options.
Don’t get duped by penny stock scams
Penny stocks have somewhat of a reputation for encouraging fraudulent practices, which is not entirely undeserved. One of the schemes used to artificially push up the price of stocks involves a group of traders buying up a large block of shares in a company that had previously little activity. They then spread positive rumors about the company in order to push up the price of the shares so they can then sell them at a large profit.
The best way of avoiding such schemes is to make sure to buy shares that you have heard about from a reputable source. Research every stock tip that comes your way thoroughly before commiting capital.
A popular way to find out about penny stocks is through a newsletter that is sent out regularly by email, but some newsletters are more reputable than others. The best way of finding out which ones to trust is to subscribe to a few and track the investments over a few months. You will soon be able to distinguish which newsletters offer consistently profitable investment advice and which ones are just out for your money.
Finally, it is always a good idea to balance your portfolio with other types of stocks. Penny stocks can be a great way of making money fast if you know what you are doing but you risk losing all your capital if you put it all into one place.
