A Time Tested Approach To Penny Stocks

Penny stocks represent an incredibly volatile market, and shares are typically harder to liquidate. It would seem that all signs point to outright avoidance of penny stock trading. But herein lies a missed opportunity for investors looking for potentially massive gains in the market.

First and foremost, we need to understand what exactly we’re talking about when we say “penny” stocks. For those unfamiliar with the jargon, penny stocks represent outstanding shares of smaller companies with small capitalization. Put simply, shares of penny stocks can range from less than $1 per share to less than $5 per share. This is in line with the definition from the U.S. Securities and Exchange Commission.

Though highly speculative, investors have the ability to buy large quantities of penny stocks in exchange for less money. This is compared to the same share volume of blue-chip stocks. A price gain of mere pennies on the dollar can result in lucrative gains for penny stock investors. Having said that, this volatility can cause penny stocks to plummet.

Why Invest In Penny Stocks

Many investors wonder, aside from the obvious facts, why investing in penny stocks is such a risky decision. First of all, small cap companies aren’t required to adhere to the same rules and regulations of large cap companies. These companies can fly under the radar, resulting in minimal public information available for investors looking into these companies. In addition to a lack of pertinent information in circulation, most penny stocks trade in low volume. This could make it hard to sell when it’s time to take profit.

For those of you still determined to invest in penny stocks, I applaud your bravery and will guide you on your journey. The best advice that financial analysts often recommend is to do your best to minimize risk when buying penny stocks. If you’re looking to invest in a penny stock, try to find stocks with relatively high liquidity. The reason for this is so that if you choose to sell your shares, you’ll have a better chance of getting rid of them. The “golden rule” for buying penny stocks: choose penny stocks that trade at least 100,000 shares per day, and are valued at no less than $0.50 per share.

As with any type of investment, it is important to do your research. Make sure you fully understand what you’re investing in. When buying penny stocks, this methodology is exponentially more important. The increased volatility and low liquidity of it all make this a prominent factor to keep in mind.

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