Do You Know How To Invest In Penny Stocks?
So here you are, searching how to invest in penny stocks online and you find this article. What I will say first, is welcome, you’re in the right place. One of the hardest ways to make money with penny stocks is by going it alone and not learning the basics first. While it’s a simple process to set up a trading account, fund it, and buy penny stocks, there’s a lot more that goes into becoming consistently profitable. So for this article, we’re not only going to discuss how to invest in penny stocks but also different ways to do so, and, more importantly, how to address the elephant in the room. What I’m referring to is risk.
Penny stocks go hand-in-hand with high risk. We’re not just talking about the mathematics of price movement, traders need to consider other factors that influence risk. These cheap stocks have been prone to manipulation by bad actors, companies raising money at deep discounts, some penny stocks lack liquidity and more.
First thing’s first, do you understand risk and can you handle it? When it comes to penny stocks, these can move up and down at a moment’s notice. We’ve continued seeing clear examples of this, week in and week out. You’ll watch some no-name company’s stock skyrocket out of nowhere. The volume will be extremely high, completely irregular, and before you know it, the stock’s up 100% or more. This all happens within an hour or two in many cases, but why? This is a common question. On the flip side, you might see certain penny stocks upholding a strong, consistent bull trend, then one day, again “out of nowhere,” there’s a massive sell-off in the stock that completely erases the last few months of gains, but why?
How To Invest In Penny Stocks
These are a few, very real scenarios that you need to understand when looking to invest in penny stocks. Furthermore, you need to determine if, in fact, investing is what you want to do. Since most stocks under $10, let alone stocks under $5 are low-priced, small price shifts can equate to large percentage changes. Case in point, a $5 penny stock that moves up $0.10 really doesn’t amount to much as far as position value goes. But if you’re talking about stocks under 10 cents, for example, that 10 cent move means your value has at least doubled. Herein lies the struggle. Are you comfortable day trading penny stocks or do you truly want to invest?
Investing v.s. Day Trading
Obviously, for investing in penny stocks, the goal is to make money. But the timeframe is much longer than a day or two. Technically speaking, the standard definition of investing entails holding an asset for years or even decades. When you’re talking about day trading penny stocks or even swing trading, the hold time is counted in days and maybe weeks. Investors don’t pay attention to small, short-term losses as the goal is a longer-term gain. But why would anyone choose to invest in such high-risk companies? A lot of that has to do with what they think is the longer-term potential. Maybe they see something in a certain company that they saw during the early days for market leaders.
Don’t get me wrong, people, for the most part, focus on how to day trade penny stocks rather than invest. But for certain people and situations, investing has actually paid off big. Take, for instance, Nio Inc. (NIO Stock Report). This was a company that we’ve followed since it first dropped into the penny stock range. The company had been going through hard times, bad management, shoddy financials, you name it. What was only moving on apparent hype alone, finally reached a breaking point that took the stock to nearly $1.
Companies like Tesla (TSLA Stock Report) remained steadfast in the mission to bring EV to the mainstream. In this light, Nio Inc. pulled an about-face. The company made critical changes and focused on righting the ship, so to speak. An investment in NIO stock at the start of October (2nd) of 2019 is currently 25 times larger as of the date of this article. That’s right, holding this penny stock with a long-term vision would mean NIO stock could’ve been purchased around $1.20 and a $1,000 investment is now worth $25,000 all within about a year. This isn’t an outlier either.
Is Investing In Penny Stocks Worth It?
Workhorse Group Inc. (WKHS Stock Report) is another clear example. When WKHS stock first hit our radar it was trading around $0.85. That penny stock is now worth over 17 times what it was back in May of last year. Solar energy hardware provider Enphase Energy Inc. (ENPH Stock Report) has made early buyers of this penny stock a lot of money since January 2019. At the beginning of the year, ENPH stock was still trading below $5.
It had just experienced one of its strongest moves in 2018, which took shares from roughly $2.40 to around $4.80. From then on, ENPH stock managed to climb to highs of $118.94 in 2020. That means an investor with this on their list of penny stocks to buy at $2.40 could’ve made 48.5 times their money. Even investing $100 into ENPH early, would’ve been worth nearly $5,000 by this year. When you consider how to invest in penny stocks with $100, ENPH is a prime example of a long-term approach to the right penny stocks to buy.
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These are just a handful of hundreds of examples I can give you. Even this year we saw plenty of stocks under $5 run up to $15, $30, and over $100 during the span of several months. While it hasn’t been a full year, yet, shares of companies like Novavax (NVAX Stock), Blink Charging (BLNK Stock Report), or Tupperware (TUP Stock Report) – all penny stocks we were following closely this year – have risen by huge multiples within the last 10 months. Tupperware stock, for instance, is a prime example of penny stocks that turn into mainstream names. Readers of ours saw it first when TUP was trading around $1.60. Compared to the $34.41 highs at the end of October, TUP stock climbed 2,050% or 20.5X in just a few months.
How To Start Investing In Penny Stocks
So where should you begin? First, I would say that even before you put one dollar of your hard-earned money into the market, you educate yourself. Proper education is priceless and as stereotypical as that might sound, it’s true. The average newbie trader going it alone typically loses more money learning on their own than they would, had they studied first, tested strategies with paper trading, then began trading with real money instead. It’s your prerogative at the end of the day. Just understand that the market isn’t going away in the next few months. So taking some time to learn beforehand doesn’t mean you’ll “miss out” on anything.
When it comes to investing in penny stocks, fundamentals play a large role. While technical indicators are also important, a focus on broader trends is more applicable. Take, for instance, penny stocks that fluctuate 20-30% a week in price (both up and down). In general, such stocks will have more of a flat chart trend if not a downward trend. It’s exciting to watch and day traders love stocks like that, but we’re talking about investing. Some of the best investors focus on boring “trades”. These are ones that might not have those huge volatility swings, but over the course of time, a more well-established trend from a company executing on its business model can end up producing significant gains.
Investing In Penny Stocks Still Requires Frequent Attention
When it comes to investing vs day trading penny stocks, the focus, believe it or not, might be better suited for boring than exciting. On another note, even if you find these types of companies and stock charts, monitoring your investment more frequently is also important. These are still penny stocks we’re talking about. One bad report or missed earnings can really trigger volatile swings and huge sell-offs. Nokia (NOK Stock Report) was a great example of this. If you look at its trend from March to August 2020, though volatile, it was an uptrend, overall. NOK stock climbed from around $2.50 to over $5. It was an established name in telecom and one of the top 5G stocks to watch. But at the end of August, NOK completely fell apart.
For this reason, some “investors” will end up, more or less, doing “long trades” on penny stocks. The saying goes, “hold a core, trade a core” and that applies to establishing a lower cost basis, adding to that position, selling off pieces over time, adding more, selling more, etc. as the price goes up. It’s also called “tier trading” because you buy and sell in different tiers.
The idea is to capture profit along the way during an uptrend while also utilizing a lower cost basis along the way. If a situation like NOK were to happen, this “long trade” would generally secure most of the profit during the uptrend and if a large sell-off ensued, a trader would cut that loss quickly. The final trade might be a losing one but based on this tier method, profits were secured along the way resulting in a net positive for the trader. Check Out More Information on Tier Trading Here.
Some Final Thoughts About Investing In Penny Stocks
Investing in penny stocks takes a lot of skill and trust in your strategy. It also requires you to think on your feet and with a clear idea of the companies (not just the stocks) you’re investing in. One thing to always keep in mind is nobody goes broke by taking a profit. So even if you’re planning on investing and a stock hits a good profit target, it’s OK to make money along the way. Just because you wanted to invest in penny stocks doesn’t mean you have to hold them for longer than a year. It’s also ok to change your strategy along the way as the market, stock, and target company evolves and changes.
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For instance, if you wanted to invest in the overall market at the beginning of the year, and chose the S&P ETF (SPY ETF Report), you would’ve had to adjust your strategy a lot. Putting money into the SPY at the start of the year with the expectation of holding onto it for at least a year, would have been an interesting turn of events. In many cases, investors will set certain safeguards against large losses so as to preserve capital in events like we saw earlier in 2020. Things like stop-loss orders act as backstops to large losses. Essentially an investor would set up a stop-loss where their “max pain” is.
The long and short of it, however, is simple. Penny stocks are high risk and understanding how to day trade and invest in them are both important. Again, remember that it’s ok to take a profit when it’s there. Also, there aren’t any rules that say investors have to hold forever and day traders must sell in 24 hours. This is the stock market and it’s your responsibility to make money with it no matter how timing works out.