Before Investing In Penny Stocks You Should Understand What They Are
Buying penny stocks the same as buying blue-chip stocks. Both are equities, sure, but the cheaper the stock, the higher the risk, in general. Penny stocks, for instance, are much smaller than some of the well-established companies in the stock market today. This having been said, investing in penny stocks is easier said than done. It’s much different than day trading, for instance. When you’re investing, you’re taking a longer-term view on something. Due to the inherent volatility in price, investing in penny stocks can be tricky. For this reason, many opt to day trade or swing trade penny stocks more than invest.
Keep in mind that even though these stocks move quickly, they shouldn’t be treated like lottery tickets. Like all stocks, these are investment vehicles. Obviously the draw of “penny stocks” originates from the huge gains that can be made, many still treat these stocks like a less important investment option. You’ll hear the term “YOLO” among traders who may be newer to trading. Long story short – You Only Live Once – isn’t a great strategy to follow.
Regardless, many of these same investors end up getting burned. Many assume penny stocks are ones trading below $1 per share. This has further been expanded on by the Securities and Exchange Commission to define penny stocks as those trading for less than $5 a share.
What Are Penny Stocks & Who Are The Companies Behind Them?
Most of the companies behind penny stocks are speculative in nature. It isn’t unlikely to see some of these companies operating with little to no revenue, heavier debt loads, and slow-moving progress when it comes to operations. Furthermore, because of the higher costs for listing on a major exchange, many penny stocks trade Over The Counter.
These are known as OTC penny stocks. Though some penny stocks trade on the NYSE and NASDAQ, they are required to have a bid price of at least $1 or $4 depending on the exchange. These companies choose to list Over The Counter because the OTC requires less as far as filing fees.
It costs less to be an OTC penny stock versus a NASDAQ penny stock or one listed on the NYSE. Based on this fact, certain penny stocks can pose even more risk than others. What’s more is that those who have trading accounts on platforms like Robinhood or Webull, for instance, have limited to no access to these stocks. This doesn’t mean you can trade penny stocks on Robinhood. But it does mean that the type of stocks accessible are ones listed on the major exchanges, for the most part.
What Are Penny Stocks And How Do I Find Public Information?
Taking into account, penny stocks trading on the OTC, it’s important to be able to find as much information as possible. This is based on the fact that these stocks tend to see the highest risk of manipulation. If you get an email on certain penny stocks explaining how great a company is. Nine times out of ten, that’s considered penny stock promotion. It’s ok to get that information but it’s also important to do your own research before deciding to buy penny stocks like this.
OTC stocks aren’t subject to the same rules as larger stocks. Because of this, many companies will report the minimum amount of information. So it’s important as an investor to understand this and account for it. Furthermore, many companies have a relatively shorter history of existence. So they will have a short history to take into consideration.
Then again, it isn’t just about OTC penny stocks. You’ve also got NASDAQ and NYSE listed names experiencing big or irregular activity as well. This may coincide with news headlines. It may even have something to do with large groups of traders finding such stocks and actively trading them. In many cases, momentum can fuel more momentum so keep that in mind. If you’re looking for penny stocks to buy, volume is a good sign of increased interest. It’s also important to understand the underlying catalysts too.
What Are Penny Stocks & How Should You Gauge Liquidity?
Penny stocks usually have less liquidity than larger companies. This means that these stocks trade less dollar volume per day than blue chips. Based on this, investors of penny stocks may be forced to offer shares at lower prices in order to attract buyers.
This is key to finding the best penny stocks to buy. Pay close attention to the average daily liquidity. This is in comparison to simply look at the volume on a single day. Penny stocks can breakout big one day and are completely quiet the next. So, finding active penny stocks to buy is important.
The one day pops are great if you can profit quickly. But they usually are associated with promotions. Since these penny stock promotions can be fleeting, holding for longer than a day can be extremely risky. However, if you find a penny stock that has real news, complete financials, and no apparent promotion, it may be one to add to your list of penny stocks.
Ready To Make Money With Penny Stocks?
While there’s plenty of money to be made with penny stocks, you need to be able to handle the risks involved. Doing complete research is one way to avoid higher-risk stocks. Even though some stocks may “look good” on the surface, it may be more difficult to sell these when it comes to taking your profit.
There’s so much that goes into researching penny stocks and due diligence. Not only news headlines and speculation but also where to find important SEC filings and how to use them are key. Many companies won’t release news and instead opt to file information with the SEC. Furthermore, you can keep an eye on company Twitter accounts as these have been designated as options for releasing public information.
Check out our article: What Are Penny Stocks & How Can You Make Money Day Trading Them?.