As you may guess, penny stocks are stocks which can be in general widely known as highly risky mainly because they trade at a rather low price and tiny capitalization. These stocks belong to small public businesses and trade for less than $5. Several companies can trade for below $0.01 – these companies typically have very large floats. Others however have low volume, making it difficult to get filled at the bid and ask prices. Small caps don’t have to worry about listing requirements and regulatory standards – making due diligence very difficult for investors. Its this heightened risk factor that helps to create success stories of investors who took $1000 and turned it into millions of dollars within a few trades. A 1 penny move on a 1 cent stock is a 100% profit – effectively doubling your money. Profits of 1000%+ are not unheard of. The most popular factor for small caps is their ability to rocket higher very quickly.
There are certain ways to lower the risk factor of investing in this less than $5 stocks. It doesn’t matter if you decide to do your own research on small caps, or put some money towards software for stock trading, there are important things to keep in mind. The first step is to look at these companies with a critical eye. For a lot of these companies, the lack of comprehensive and compelling business plan makes them an even risker investment. There are several penny stock sites that offer a newsletter service – the information found therein is a start, not the end of your due diligence. There are several fee based subscription services you can sign up for that may provide some useful insight into how to pick the right penny stocks.
Looking at penny stock success stories over the years, it can be easily said that one must look for companies with consistently high volume of traded shares. Consistent volume should allow you the opportunity to get in and out at the bid or ask price. A stock can trade 50 000 shares daily, but if you have 100 000 shares, its too illiquid. Liquidity is key to successful penny stock trading. Using average daily trade volume is a great way to filter out great stocks from poor stocks. The secret to making money with penny stocks is no different than large caps: does the company know how to sell its products or services? Companies that take this profit and expand their business end up rewarding patient shareholders by increasing the value of the company. Is your potential small cap purchase looking for financing, or looking to take profits and make more money? The chances of a higher return are much more when an informed decision is made on the basis of thorough research. You can’t escape volatility – its what gives penny stocks their potential for huge returns. They can crash down as quickly as it goes up without any hint whatsoever. Therefore, it is a must to have an entry and exit plan which should be followed under all circumstances. Its strongly recommended that you don’t invest any more than 10%-20% of your trading capital in penny stocks.
It is very easy to get inspired by the several examples of penny stock success stories in the recent years. Its not as easy as it seems. Just because someone got lucky with 38 penny stock picks, doesn’t mean its going to happen to you. Use caution.