Though it’s true that high risks are associated with penny stocks but there is a path to profits. Investors who have learned the game of penny stocks and know how to make money with it can make quick profits through penny stocks.
Now, the question is whether you can make money with it or not? The answer is ‘YES’. You just have to keep in mind that normal stock trading and penny stock trading, both are different. It’s very important to know all the aspects and facts of penny stocks before you start with it.
What are Penny Stocks?
In the stock trading world, investors use various names for penny stocks such as small caps, microcaps, stock under $5 and many more. All these names share one common thing and that is, penny stocks are not listed in major stocks and they require a totally different approach of trading.
Facts on Penny Stocks
- Penny stocks are often traded on the OTC (Over the Counter) markets. They are not listed on the New York Stock Exchange and other trade markets.
- Younger companies with low cash reserves are usually tied with penny stocks.
- One can define penny stocks as the securities owned by private organizations.
- Very strict rules are made by the US Securities and Exchange Commission on penny stock trading.
- It’s very hard to price penny stocks accurately.
Pros and Cons of Penny Stocks
• Turning small investments into a big amount
• Tomorrow’s big winners
• Low-quality companies
• Risky markets
• Different Stock Broker Regulations
• Shocking Valuations
• Lies and scams
Money-Making Penny Stock Trading Strategies
This strategy works on a simple funda, ‘buy cheap, talk up, sell high’; that is, buy penny stocks at a cheap price, convince and influence other people regarding its worthiness in respect to the price paid and then sell it on a high price. Although it’s one of the most difficult strategies of penny stock trading and also unethical, you can make good money if have really good convincing power.
Luck is definitely not a strategy but the idea of including it into penny stock trading strategies is to buy cheap penny stocks and then wait for your luck to change and then sell it. There are no certain possibilities of your luck to be in your favor as the tables can turn around any time. So, hope for the best.
Find a Turnaround Company
The only practical way of making money with penny stock trading is doing proper research, buying a discounted stock on the upswing and being patient, just like the normal trading. Businesses don’t grow over the night, they take time to grow, to get back on their feet, to become stronger. These are the stocks that will make money if you do proper value analysis.
Tips for Picking a Winning Penny Stock
You can pick a winning penny stock even if the risk is very high and the liquidity of penny stocks is low. Just apply these tips to become the winner of penny stock trading:
• Aim for heavier trade volume penny stocks
The reliability of penny stocks depends on how much tradable they are. Always focus on a high trading penny stock.
• Stick by the rule of ‘over .50 cents per share’
It is a thumb rule of trading where you have to trade in penny stocks with a price over 0.50 cents per share. Always remember that stocks that trade for less than that price are generally hypothetical and companies with no recognized track records of success fall in those stocks.
• Only buy money-making penny stocks
Do proper research before buying a penny stock. Check for the documented proof of profit that the company claims to make so the chances of losing money on purchased penny stock are less.
• Be patient
After knowing the right penny stock which has the capacity to offer potential gains, don’t jump on to buy it instantly. Track that stock for a week and monitor its performance, its trade volume and then purchase it.
Penny Stocks Investment Rules
Despite the high risk, in the past few months, investors have got some fantastic returns from penny stocks. Keep these rules in mind if you also want to invest your money in this risky market segment:
• Avoid investing large amounts
Penny stock trading is a highly risky investment. It is advised to not invest larger amounts in these stocks. Invest only what you can afford to lose as the risk is very high and profit is quite less.
• Don’t believe any random person
You will get a lot of financial forums on the Internet where various advice and information are published regarding penny stocks. Do your research properly and don’t believe other especially in buying penny stocks. Firms generally try to sell the junk of their portfolio at a higher price and many times people get fooled by purchasing those stocks and suffer the loss.
• Try to invest only in 2-3 stocks
Avoid picking up a larger number of penny stocks and invest only in 2-3 stocks which you think are valuable and will make profits in future.
Things That Every Penny Stock Trader Must Know
There are some essential things which are needed to keep in mind in order to succeed with penny stocking.
• How to build your penny stock trading mindset
To succeed in penny stock trading, you should focus on watching the stock performance. Avoid investing a large amount of your trading account on a single penny stock.
Set your risk tolerance boundaries. Frame your own rules and follow them strictly.
In penny stock trading, chances of failure are very high. You might fail again and again. Despite avoiding failure, you have to learn from it. Eventually, you will notice that your failures are turning into success because you have learned from your mistakes.
• Common investment types in penny stock
Basically, we are surrounded by investments. They are all over the place. Some are legitimate, while others come out to be scams.
• Important terms in penny stock trading which you should know
There are some terms in penny stock trading which you should be aware of. They are:
Moving Averages: Average price per share of a particular stock over a specific period of time.
Breakout: Breakage of stock through resistance for the rise in price.
Resistance: A value price for a stock that doesn’t appear to probably move outside of a breakout.
Breakdown: Stocks that get through resistance from the decline in cost.
Support: It’s the same as resistance. The only difference is that it is supporting a lower value point underneath which the stock is probably not going to fall.
• Functioning of wall street
Wall Street is the financial centre of stock market trading and is actually a road in lower Manhattan. Successful trade firms operate in Wall Street.
Penny stocks are not traded on the New York Stock Exchange, they are traded on the OTC Bulletin and small-cap market.
• Key indicators
In order to determine the performance of your penny stock in the future, it is important to look at the key indicators. There are some positive as well as some negative key indicators which you have to look upon while trading penny stocks. Through these indicators, you get an idea about the kind of risk you are taking on by investing in a particular penny stock.
Following are the positive indicators which you should look upon:
Positive industry news
Increased trade volume
You should also look at these negative indicators. Negative indicators suggest that you should avoid stock or short-move it:
Poor industry news
Reduced trade volume
Financing anchored through distress
Bits of gossip about antagonism from inside the organization
• Key penny stock chart patterns
A better trader knows how to read the chart patterns. Chart patterns also tell us the stock behavior in specific market conditions.
Common chart types
Chart pattern describes the movement of stocks over time. Following are some chart patterns which you should learn in penny stock trading:
Clean Chart: In a clean chart, the price of a stock moves only in one direction- upward or downward. A clean chart shows almost no variation. They are highly predictive and you can take advantage of quick profits through it in a long position.
Clean Bullish: It shows a stable upward trend. After the brief decline, stock price rises very quickly. At this time you should invest your money in penny stocks because you can see the continuity of trend.
Clean Cup and Handle: In this chart type, you will be able to identify a shape of a cup and handle. The trend is smooth in downward direction followed by an equally smooth upward trend.
Clean Bearish: A clean bearish chart is the vice-versa of a clean bullish chart. In this chart type, you will observe a definite decline in the stock price over the time.
Messy Stock: In messy stock chart type, you will observe that the stock price jumped for no reason, then fall down a little bit, rose a little bit, again fall down and so on.
Messy Breakdown: At first, you will see the upward trend in the messy breakdown chart. The chart looks pretty appealing at the start and then gradually drops down.
Things needed to succeed in the penny stock market
Creating a set of rules is one of the most important things you should do before investing in penny stocks. Since these set of rules define your trading strategy so the chances of breaking these rules by you are very low.
Before creating a rule, understand the logic behind it. Sometime, your defined rules may not work for you properly because of your different risk tolerance or goals.
Ways to Minimize Risk in Penny Stock Trading
It’s now clear that money can be made with penny stocks but you can lose a lot of money as penny stocks are a risky investment. But there are some ways through which you can lower the risk and put yourself on a safe side where actually money can be made with them.
• Pink Sheet stocks are generally manipulated and are fraud stocks. Do not invest in those stocks. Invest in reputable companies as these companies will not only give you a return but are also considered as a less risky investment.
• Focus majorly on trading than on investing. Trading penny stocks everyday will make money rather than investing in the next big stock.
• Avoid overtrading. After finding the desired stocks, buy them, know the perfect time to sell them and take out quick profits.
• Pick stocks from companies of OTC markets strict financial standards are made for those listed companies. These firms are having an attention-grabbing standard of operations and are less risky.
The Bottom Line
Trading penny stocks is not a great option because of the high risks and uncertainties associated with it. However, if you risk tolerance high and if you are a quick thinker then you can make good money through penny stock trading. Now that you know making money is possible from penny stocks, you can educate yourself on how to become an expert in penny stock trading by learning different tips and tricks. Frame your own strategies and be a keen observer as observing trend pattern in penny stocks is very important to gain a good return.
There are many pros and cons with penny stocks and it is truly a personal decision whether to invest or not in penny stocks.