So you’re ready to start investing but don’t have tens of thousands of dollars to invest in shares of Facebook or Twitter. You may want to look at penny stocks. Before you dive right in, it’s good to know some tricks of the trade when it comes to buying the right penny stocks.
It’s also important to know what the risks are and how to avoid them as best as possible. The right amount of diligence is needed as well. Unlike the blue-chip companies mentioned above, penny stocks allow people to buy more shares, with less money in the hopes of making good money with penny stocks without risking a lot of capital.
What Are Penny Stocks?
This is an excellent question for new traders and investors. The term “Penny Stock” is defined by a stock that trades under $5 per share. Even though some stocks trade on major US exchanges like the NYSE or Nasdaq, most penny stocks trade “over the counter” through the OTC Market or OTC Bulletin Board.
This is an electronic trading service that is operated by FINRA or “The Financial Industry Regulatory Authority.” It also calls for these companies to meet a minimum standard for reporting financial information for the public.
Penny Stocks Are Usually Smaller Company Equities
Penny stocks are usually associated with smaller sized companies, many of which could be considered start-ups. Because of this, investors could have trouble finding penny stocks with high levels of liquidity. This means that there is lower trading volume for many penny stocks.
This can make for a tough time when it comes to selling penny stocks. Investors may also have difficulty finding a stock price that is accurately reflecting the current market for a stock. It’s always important to keep this in mind before deciding to buy a penny stock.
Finding The Best Penny Stocks To Make You Money
Now that you know what penny stocks are, it’s time to start formulating your plan of attack. As mentioned above, since penny stocks can be very risky investments and highly volatile, you need to trade smart. Know what to look for to see what makes a penny stock a potential moneymaker. Note that these are not guarantees, but they are good rules of thumb to keep in mind.
Characteristics Of Penny Stocks That Could Make You Money:
1. The Company Should Have Substantial Assets
Novice investors may come across penny stocks that are skyrocketing, but many of these can be “fly by night” schemes. These types of companies will typically have little to no assets or cash and boatloads of debt. When it comes to making money with penny stocks, look for companies that have substantial assets. They will be more likely to have a real business plan in place and are looking to grow the company rather than pump shares into the market.
2. The Company Should Have A Plan
If you come across a penny stock that has little or no news, very few financial documents, and a limited amount of information, beware. It’s important to look for penny stocks whose companies have significant amounts of public information. This should outline the corporate strategy, growth plan, significant milestones, and more to show that this is a real company.
3. Beware of Overly Optimistic Projections
You don’t see large-cap corporations like Netflix or Amazon “expecting to increase revenue by 40,000% next quarter.” Likewise, beware of companies releasing news that is too good to be true. Instead, utilize the two points above to help deduce the truth behind any corporate guidance. If it sounds overly optimistic, it could very well be the case.
Ways To Find Good Penny Stocks To Buy
If you want to trade penny stocks successfully, you need to find the best stocks with the highest probability of making a big move. Some traders will look for strong fundamentals, but most traders will rely on technical penny stock scanners to track irregularities in the market.
If you are building your own penny stock scanner, you’ll want to include at least one of these parameters:
This refers to the total number of shares in the publicly traded float or market. This includes everything in retail shareholder circulation. This figure is calculated by removing the shares held by insiders/employees from the overall outstanding shares. Mostly, the lower the float, the lower the number of shares that are trading at any given time. Higher levels of buying interest could drive prices up quickly.
Scan For Penny Stock News
Track for companies that are making announcements. This could become an active catalyst to push stock prices higher on company optimism.
Penny Stock Volume Scan
Look for companies with higher relative trading volumes. Traditionally, the higher the relative volume, the more traders will be watching and trading a specific penny stock. This means plenty of liquidity to enter and exit a trade.
You’re Ready To Make Money With Penny Stocks
Having a good gauge on your risk tolerance and knowing the basics of penny stocks will put you at an excellent starting point to begin trading. If this sounds like the right choice for you, your next step is to find the best broker and maker your first trade. Always keep your strategy and personal set of trading rules in mind in order to avoid taking significant losses and capitalize on big gains.