Penny stocks have always been alluring. Countless movies and books have emphasized the various ways to get rich with small investments. The rags-to-riches stories of making money with penny stocks are prominent in popular culture.
It’s true; a small investment in a company with a stock price under $5 can turn into a huge windfall. It’s also important to remember that this is still an investment. All investments carry specific amounts of risk as well.
Penny stocks, in particular, carry their own risk profile, unlike most other investment options. There are several reasons why. For starters, penny stocks are small-cap and micro-cap companies. This means that the market capitalization for these companies is much smaller than their blue-chip counterparts.
With smaller companies, you must consider that the stocks are thinly traded. Big bursts of buying or selling can send penny stocks hurdling in one direction or another quickly.
How Much Money Can I Make With Penny Stocks?
Here and there, you’ll hear about people making money with penny stocks. Depending on who you’re talking to, this “money” can be small. For some new traders, a 100% move is excellent, but when it’s 100% on a $50 position, it may not appear as a “big money” trade. It all comes down to managing risk.
Perspective plays a significant role. Specifically, with penny stocks, most will stick to a rule of thumb to not risk more than they can afford to lose. If you wouldn’t bat an eye at losing $100 but losing $1000 could hurt your pocket, starting with $100 may be the best route.
But how much money can you make with penny stocks? The short answer is that it is based on your risk profile. Anyone can say you can make unlimited money with penny stocks. But realistically, a cap is based on how high a stock moves. Furthermore, it’s also based on how much you’re willing to invest. It’s much harder to make a $1000 profit with $100 invested than with $1000 or more invested.
Remember To Have A Plan
It all boils down to having a proper trading strategy and plan. If you treat the stock market like the lottery, you’ll likely win at trading just as much as you do at playing the lottery. For the vast majority, the likelihood of winning the lotto multiple times is slim (just putting it out there).
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But what do I mean by having a plan? For starters, you may want to focus on companies you understand better than others. Trust me, making a big score off a stock you know nothing about and just playing the momentum is great. But it’s tough to duplicate. On the other hand, let’s say you understand the mining sector very well. You know how geopolitical risks can impact these stocks.
And let’s say that you just read something about the Fed lowering interest rates for banks while global trade could see a shakeup. Sound familiar? If you understand how gold trades, you may see the opportunity to buy penny stocks in the sector.
Penny Stocks: Avoid Trading On Hype Alone
On the flip side, if you don’t understand mining, you’re likely to be trading based on sentiment or hype seen on social media. This is a very dangerous position to be in. There are several risks in this case. First, the people you are listening to may have already bought shares of the penny stock they’re hyping.
There’s a good chance they’re selling as they are hyping up the stock. In this case, if buying volume dries up, you could get trapped in a stock that has a bearish fate that lies ahead. Another risk of buying penny stocks based solely on sentiment is that you may not understand outside catalysts that may signal it’s time to sell.
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Let’s go back to the gold example. If rates are set to decrease, and everyone is rallying behind gold, great. But if rates don’t decrease or decrease by less than expected, it could be negative. If you don’t understand the psychology of trading gold, this even may go right over your head. The result is you could lose your profit or be stuck holding worthless shares.
Avoid Unnecessary Risk
Sometimes it’s better to sit on the sidelines than make every single trade out there. Let’s face it; when it comes to penny stocks, plenty of big movers are out there. There could be ten or more money-making penny stocks to buy daily. But timing is essential.
When did you see the stock initially? Was it already trading near its highs, or was it already on its way down, what did it look like? If you don’t understand why some penny stocks are breaking out, it may be better to hold your cash instead of risk it because you’re afraid of missing out.
FOMO – fear of missing out – is one of the biggest reasons investors lose money with penny stocks. Just because you don’t participate in a trade doesn’t mean you’ll never see another good trade again. It’s just the opposite. On an almost daily basis, there are plenty of breakouts from several penny stocks.
But it’s essential to treat your cash just like a position. The trade-off between holding cash instead of risking it on a highly speculative, high-volatility trade you know very little about is significant. The bottom line is that no one ever went broke taking profit, and no one ever lost money by holding onto cash positions.
Are Penny Stocks Worth The Risk?
At the end of the day, the choice is yours. Penny stocks are very speculative and highly volatile, and investments generally don’t guarantee a profit. There are degrees of risk involved. But at the same time, if you ever want to make money with penny stocks, you must educate yourself on this class of equities.
Learn the ropes first. Do things like paper trading, learn from a real mentor, and take your time. Just as I said above, there’s never a shortage of stocks breaking out. Check out this article to get started in the world of penny stocks: How To Make Money With Penny Stocks.
