4 Things to Know Before Trading Penny Stocks

Penny stocks are so-called because of their low price per share: typically each share goes for lett than five dollars each. Some penny stocks sell for less than a dollar per share, hence the moniker. Penny stocks are enticing because they offer the possibility of a large pay-out for minimal investment. However, a loss is a loss. To be truly successful at trading penny stocks, there are a few things you must know. The following useful tips are necessary to know before getting into penny stock trading.

Study the company behind the stock

Image via Flickr by Haneesha Goli

Like all things worth investing in, penny stocks require some background to ensure you make a maximum return on your investment. By conducting some research on the company behind the stock you will be better aware of the type of risk you are taking. Penny stocks are known for being volatile, and their value changes quickly. The history of the company can be a strong indicator of the investment and any opportunity for growth. You will want to identify any patterns over time and really study the trajectory of stocks over a period. This will help you identify those stocks that are worth every penny.

Tracking stocks’ numbers

Most companies that trade with shares lower than five dollars have small market capitalization. When analyzing your choices, consider the fundamentals. Consider if the company is profitable with its current business structure and if it can compete within its sector. You will then want to have a plan for exit and entry. Consider how much you are willing to lose if the value drops and be sure to sell before. Penny stocks are not intended to be held on to for a long time, unlike other investments. Stick to stocks with a high number traded daily, so if you do have to sell, there is a large possibility that you can get out quickly with minimal loss.

Small losses and big gains

When you are trading penny stocks, you can only lose whatever you initially invested. However, when you do your research, you can effectively choose a stock that has the potential for large growth. This research preparation will prevent you from selling-short. To sell short means to buy and then quickly sell stocks, hoping to make a profit quickly based on your sale. However, getting out too early may cause larger losses, because as the value of the stock rises, so does the amount of what you could have potentially gained. With penny stocks, it is sometimes advisable to be patient and see what the market does.

Trading penny stocks online

When trading penny stocks, find ones that are likely to increase in value. Go with what you know and follow the information the research is telling you. Penny stocks are cheap because people aren’t buying them. So be sure what you buy is something you will be able to sell. Some people use stock screeners and filters for things like price, chart performance, or liquidity. Even though the price per share may be low, be sure you are getting value for your investment. If it interests you, there are ways to trade without needing a broker. Additionally, read the fine print on any agreements before you accept it. Invest with care for maximum returns.