Many people who are searching for ways to boost their income discover that penny stocks are a popular investment vehicle. But are penny stocks worth it? In this article we will attempt to answer this question.
For most novice inventors trying a hand in stock investing, their first stop is usually penny stocks. Put simply, penny stocks are companies that buy and sell with a low share value, normally less than $1. These extremely small share prices allow investors to hold thousands of shares for a considerably low amount of invested capital. Using that scale, gains of just a few cents per share can turn into huge percentage returns, but the opposite is also true. Trading in penny stocks is not as hard as people perceive it to be, with a little assistance and practical resources, just about anyone can learn to invest in this market.
Rise Above The Myths
As more and more investors are learning to navigate this volatile sector, plenty of half-truths and falsities overwhelm some along the way. Learn some of these misconceptions before you venture into this market to have a good chance of success. One common myth is that you can time the rise and fall of the penny stock market. The truth is no one has a crystal ball. Investors who are successful in this market make decisions based on practicalities and fundamentals. Some have also been led to believe the only way to deal in penny stocks is to short it, but you must understand not all companies in this market are doomed to fail.
Another widespread fallacy is that you must act now or you will miss the opportunity. In most cases, these are usually pump and dry schemes, which will use every market-advertising trick in the book to get you to buy a particular stock. Do not invest in something simply because it is popular but instead apply time-tested investing strategies and analytical measures. Another misleading notion in penny stocks is that exposing yourself to greater risk equals to greater gains, but this goes against the purpose in investing, which is to mitigate risk. Just because a stock is cheap does not mean the probable outcome is mile-high profits. Apply the basics of investing when trading.
How To Begin Trading Penny Stocks
To start trading in penny stocks, you need to find and open an account with a stockbroker first. When opening an account, you have to consider various factors such as customer service, fees, and ease of transferring funds. Brokers specialize in different aspects, so take your time shopping around for one that will meet your needs. Next, you need to know where to look for penny stocks. Major stock exchanges such as Nasdaq and NYSE have special listing requirements, which might be a little confusing for beginners. The easiest option is to use the Over-The-Counter Market, which arranges securities into tiered markets that reflect the degree of investor engagement, level of disclosure and integrity of the operations.
Once you know where to trade penny stocks, your next step is to establish what stocks to trade. One common ways is to use stock selection tools such as those found on the Finviz or the OTC Markets websites. The simplest way to narrow down this trading universe is to screen for stocks with a value under $1, then you can further filter the list down, depending on your risk tolerance and strategy. Head over to the sites mentioned, learn to use stock screeners and make sure you get the hang of it before you start trading.
Ways To Analyze Penny Stocks And Pick The Winners
Penny stocks do not fall under the same regulatory oversight as stocks listed on major exchanges, nor are they subject to the same reporting requirements. Thorough research is necessary to help a trader pick a penny stock company worth the investment. An excellent way to start is by selecting an industry or sector that is in an uptrend across the marketplace. Penny stocks do not lend themselves to small trading due to their tiny stock price. Many penny stocks are sparsely traded, and investors wedged on a short squeeze will have a tough time selling due to lack of buyers.
Another way you can evaluate penny stock companies is to visit the Securities and Exchange Commission to see if the stock has been delisted from a major exchange recently. The most common cause for delisting is the stock value falling under $1 a share, which makes it difficult for a company to remain in business during stock sales. Other methods you can use to analyze a company are obtaining and examining financial statements from an online financial data provider, determining how the company makes money and its potential growth, and investigating how well the board of directors and executives are managing the company.
Beware of Impressive Penny Stocks
However impressive penny stocks may appear to you at first glance, you should be cautious in your investment decisions. Often, these kinds of stocks are lightly traded, due to their low value, so they can be subject to price manipulation. Individuals or companies will purchase a lot of stock very cheaply. Then, they will start fake marketing campaigns about company expansion, to tempt inexperienced investors into buying the stock, in the hope of a huge profit.
Just like any type of index or stock trading, education and research is crucial when it comes to penny stock investing. Do not depend on “Hot” lists of stock. Frequently, these lists feature what seem to be awesome penny stocks, however the stock is over valued and will quickly plummet in price.
Know Your Market
Search for stocks that suit your personal comfort zone. This applies regardless of whether it is over the counter (OTC), or under one dollar. After you find a couple of companies that you may be interested in, research them on Google Finance. Alternatively, you can use any free service that offers accurate financial data. Find out how actively they are traded. Volumes of more than one million shares per day are a sensible place to begin. Consult the company’s balance sheet to ensure that they have funds in the bank. Healthy reserves indicate that the company should be capable of surviving through an occasional economic downturn. Look at their profit margins — big profits are always preferable and a good indication that the share value might increase.
Do as much research as possible into the company. Consider whether the product they produce is in high demand, or whether they are in a growth sector — such as health or alternative energy. Look at how many staff they employ and what they spend on research. Visit their website and arrange for an investor information pack to be sent to you, if one is available. In many instances, penny stock investments will yield a high return. However, it is a proper investment and not a fly by night scheme. Hence, you have to be ready to put some effort and time into growing your portfolio.
In conclusion, penny stocks are a good investment, as long as you approach them sensibly. One final piece of advice: if you invest in penny stocks, do this as part of a bigger portfolio. Also, do not invest over ten percent of your investment funds into penny stocks, because they do have associated risks.