This week is quite possibly one of the most volatile for the stock market in July. Whether you’re trading penny stocks or higher-priced shares, a mix of earnings hype, Fed Meeting FOMO, and general market excitement are playing a part. Will the FOMC decide to hold rates steady, or will there be another rate hike coming after the last pause? Has the economic outlook from Jerome Powell and the Federal Reserve become more dovish thanks to continued declines in inflation?
There are plenty of questions that we’ll have answers to over the next two days. The biggest question right now, however, is how can you take advantage of the current level of heightened volatility. In short, it is creating a risk-on environment for traders, and with that has come a focus on cheap stocks to buy. These lesser-known stocks, often overlooked by mainstream investors, hold a distinct attraction for some. They represent a high-reward domain but also come with a heightened level of risk.
Understanding the Terrain: What are Penny Stocks?
In general terms, penny stocks are typically stocks of smaller corporations that trade at less than $5 per share. The low individual stock price doesn’t inherently indicate a lack of value; rather, it’s the allure of substantial growth that draws investors to this sphere.
Much like any other financial asset purchase, you’ll need a brokerage account, seed funding, and a good grasp of market dynamics when investing in penny stocks. Online brokerage platforms are a favored choice among many because they provide access to a wide array of exchanges and simplify the buying and selling process. It’s important to scrutinize the fee structures and services offered by different brokerages before making your selection.
After establishing your account, the procedure is straightforward: identify the penny stock you’re interested in, determine how many shares you wish to buy, and execute your purchase. Using limit orders instead of market orders when acquiring penny stocks gives you greater control over the price you’ll pay.
Building a Watchlist of Penny Stocks
Prior to immersing yourself in the world of penny stocks, it’s vital to have a watchlist— a curated list of potential investment opportunities to scrutinize further. Starting your research within industries that align with your interests or expertise can be a beneficial tactic. Familiarity with a sector can aid in understanding and forecasting its trajectory.
Examine the financial health of the companies you’re considering. Are they profitable, or is there a clear trend toward profitability? Does their business model appear sustainable? Is the leadership team seasoned and trustworthy?
Monitoring trading volumes is also essential; higher volumes generally indicate more liquidity, which can enable smoother entry and exit points without dramatically affecting the stock’s price.
Staying abreast of news surrounding your watchlist companies can offer invaluable insights. Product launches, earnings reports, and management changes can significantly influence the value of a penny stock.
Balancing the Risk/Reward Equation
Penny stocks are the epitome of a high-risk, high-reward investment strategy. Their low share price can lead to considerable percentage gains, but this can also translate to substantial losses if the price declines even slightly.
Penny stocks are also more susceptible to price manipulation and fraudulent activities due to their limited liquidity and lax regulatory oversight. The lack of stringent reporting obligations that bigger stocks have to adhere to may also make it challenging to find dependable information.
To counter these risks, ensure your investment portfolio is diversified. Penny stocks should form just one part of your investment strategy, not the whole of it.
Additionally, implementing stop-loss orders can help curtail potential losses. This tool automatically offloads the stock if its price drops to a specific threshold, helping to protect you against severe losses if a penny stock’s price crashes unexpectedly.
Remember to stick to a disciplined strategy. Abide by your investment plan and avoid letting emotions dictate your decisions. If a stock doesn’t match your investment criteria, it’s best to pass. Other opportunities will undoubtedly come along.