How Do You Know If Penny Stocks Are A Good Investment?
Time and time again, penny stocks will attract countless investors. Whether it’s for quick profits or a shot at a big return, people will look to make money with penny stocks. But to do so, it isn’t as easy as hitting the “buy” button on your penny stock trading app. Sure, you might get lucky here and there, but in the long run, luck plays a small role.
To understand penny stocks, you need to first understand investing. All investments carry risk. Some risks are higher than others especially when considering the investment type. When you look at any list of penny stocks, you are looking at mostly start-up phase companies.
These are the companies that have fewer assets, higher liabilities and may have already raised expensive money. What I mean by this is that companies raise funds with stock. Sometimes the price that they raise funds at is much lower than the current market price.
Penny Stocks, Charts & Technical Indicators
This is a brief overview and we’ve got many more articles detailing specific topics in this article. One of those topics is penny stock charts. Understanding how to read “candlestick charts,” certain indicator types, and the like will help you in the long run.
Even if you never use technical indicators, you can at least understand them in order to determine if something you read is accurate or not. A lot of what I’m referring to has to do with the chatter you’ll likely read online. Some people like to use “fancy” jargon to hype up certain penny stocks.
[Read More] How To Buy Penny Stocks On Robinhood
It’s easy to fall into the hype if you don’t understand the basics. If someone says “this thing is oversold,” what is it based on. Well, if you read this article on RSI, and you see the level is 72, you’ll understand that the person is not basing things on certain technicals.
Know The Basics Of Penny Stocks & How They’re Funded
As with all things, loans come at a price. In the world of cheap stocks, they usually equate to more stock and lower prices. So there will likely be growing pains for a lot of these smaller companies. Regardless, it’s important to understand that not all companies are hopeless just because of how they raise money. Management is key.
Given the state of certain industries, “expensive money” doesn’t always mean death spirals for a penny stock. It comes down to how the companies manage their lenders. Even if the money raised is “expensive” a good management team will have backstops in place to protect its investors.
So a keen understanding of how to read basic financial statements is also good if you’re just getting started with penny stocks. Know how to compare assets, liabilities, revenue, and expenses.
Penny Stock News & How To Understand It
Other things like penny stock news are important to understand. This is not only from a “hype” perspective but from a fundamental perspective as well. Let’s say a biotechnology penny stock comes out with positive trial data. Well, if the market starts taking off, you would think “I have to buy.”
But the experienced investor would likely wait, read the data, observe the market, and then make a decision based on their own findings. Simply jumping in because a stock is trending doesn’t make it a good idea.
If those data were positive but later in the announcement, management cited forward-looking issues, you’ve got trouble. The gut instinct for many on positive data is to buy. But after the initial surge, further info like issues in the future could be a “gut check.” The result could easily be a huge vacuum and the stock price plummets. Novice investors get caught holding a bag, the quick flippers maybe make a small profit, and the experienced traders are still simply standing on the sidelines.
If you can’t fully grasp what certain penny stock news means, it may be best to sit out instead of taking a chance on something you don’t fully grasp. Likewise, let’s say there are negative data right off the bat. But later on in the news, management cites new trial data from an ancillary test that is positive.
Gut instinct traders may immediately sell. But as the news is digested, the stock price may abruptly reverse for the better. Early traders likely take a loss, novice traders may get “stopped out,” but experienced traders were sitting on the sidelines and waited to cue a bottom.
Are Penny Stocks A Good Investment?
At the end of the day, the answer to this question is up to you. You need to fully understand the risks involved and if you’re willing to take certain risks. Because penny stocks can be so volatile, it isn’t a spectator’s sport.
But you can do a few things to ease into it. One of those things is to start by paper trading penny stocks. This involves an investor using “fake money” to sell or buy penny stocks. Though you won’t make money if you pick the right penny stock to buy; you won’t lose money either.
Other things to consider is how much can you afford to lose? All too often, new traders go into the penny stock market with visions of grandeur. They quickly realize that cheap stocks aren’t for the faint of heart. Like anything worthwhile, fully understanding the basics is key.
If you’re looking for more on penny stocks, check out some of our basics of penny stocks articles and make sure you subscribe to receive email & text message updates.