According to the Securities Exchange Commission, the penny stock definition is any security trading under $5.00 per share. Penny stocks are low priced shares that are not right for everyone. They truly can turn a small investment into a large sum of money pretty quickly, but they can just as quickly wipe those dollars out.
Some penny stocks are good stocks that have become devalued for a variety of reasons and have the potential to rebound, while others have little chance of recovery and could be a money pit. Thousands of penny stocks are being listed in the USA stock market. It is very common to get overwhelmed. Ultimately, traders have to develop their own methods for choosing stocks which will take a lot of time and a ton of studying.
Everyone wants to choose the best penny stocks. But before dabbling in penny stocks, an investor should note several key factors that affect the way these stocks trade and have a solid understanding of the inherent risks that follow.
Check if the penny stock is right for you
There are penny stocks sold at low prices, but they can bounce back and increase in the future. Hence, you must invest your money into penny stocks with those funds that you can afford to risk losing.
A key piece of information that is often overlooked is the number of shares outstanding. So, it is important to consider the number of shares available. One of the biggest mistakes that retail investors make is that they view penny stocks as being affordable. There is a sense that one is getting a better bang for their buck when they buy thousands of shares rather than a couple of companies with a higher share price.
Understand the conditions of the market
Since the prices of penny stocks are unstable, you need to follow some financial specialists or stock advisors as they understand the business very well. With their guidance, you can avoid stumbles and get noteworthy returns.
Beware of dilution
If a company issues shares to raise capital, which many small companies need to do, then it can often dilute the ownership percentage held by other investors. When trading in penny stocks, it is important to find a company that has a strong grasp on its share structure because consistent dilution erodes the value of the shares held by existing owners.
Research the company
There can be various misleading advertisements by way of bogus and deluding data done by people who buy huge amounts of stocks. Hence, you should always research the company through financial specialists.
Start by paper trading
Paper trading is a risk free, no money required method of buying and selling low priced shares which help you to avoid big mistakes. Paper trading helps you to track imaginary profits and losses which increase our knowledge to jump into real money. After spending a few months in paper trading, you will be much better in every respect when it comes to buying and selling of penny stock shares. Before moving to penny stocks, get some actual practice to know more about the trading practices. You can do this by using demo accounts.
The price of the stock will tell you about the company’s current value in the market. Before investing in penny stocks, you can investigate the company’s financial statements and then determine its value.
Understand your investment horizon
Before investing, you first need to understand the development of funds at a particular time. There have been instances of price control in penny stocks. The key idea must be that your investment must match your particular objectives and should focus on insights.
Decide which types of companies you will focus on
Never invest you money in the “hot industry”. Always “Buy what you know.” If you are a medical scientist, you will have an advantage when trading biotech stocks. If you are an internet programmer, you will have an advantage when trading in technological companies.
Monitor all your investments regularly
While making investments in particular penny stocks, it is advisable to make a common fund review once in a while. This helps you to see whether its administration and execution are done as per your decided objective.
“We should only invest in penny stocks with risk money or those funds you can afford to lose.” Trading penny stocks is not for everyone. Keep away from low liquidity penny stocks. Focus on trading and keep low on investing. It requires a certain amount of risk tolerance along with the ability to react quickly in uncertain situations.
Avoid the pump and dump stocks. Many OTC stocks are promoted based on false and misleading statements, ensuring a guarantee of high returns. But these types of stocks open in IPO and not in the penny stock market. Whenever a company issues some additional stock, it reduces the value of the shares of existing investors and their ownership of the company. Hence, you need to be aware of the dilution effect on the values of the shares.
However, if you think you have the skills to day trade penny stocks then you need to make sure you educate yourself on how to trade them along with money management techniques to avoid losing all your hard earned capital. Always start with paper trading where you can practice trading without risking real money. You must know when to sell your penny stocks and get quick profits. Do not overtrade. Diversify your penny stocks in at least three to four different sectors.