The first investment advice most beginning investors get is to invest in a blue chip company and wait till the money grows on its own. But then, most blue chip shares are outrageously expensive; not many investors can afford to invest in such shares. Moreover, without sizeable investments in these shares, you can’t much return from the money you’ve put in. This leaves you with the option of investing in midcaps or penny stocks.
In a dull market, you can’t expect to benefit much from midcaps because they tend to be stagnant. Penny stocks, one the other hand, are highly volatile and can rake in huge profits. Needless to say, this volatility can make can also result in heavy losses. However, if you plan and invest in good penny stocks, you can make a sizeable fortune; lots of investors have been made rich by penny stocks. Knowing how to pick the right stocks is important.
What Are Penny Stocks?
Technically, penny stocks are scrips that trade under $5 in the stock exchange. However, for trading purposes, penny stocks need not be strictly in this range. They could be anywhere between a few cents to $50. Penny stocks are usually stocks of small companies that have a low market cap and are highly volatile. These stocks may soar or fall in just a matter of hours.
Why Penny Stocks?
- The obvious advantage is the cost; you can make a good investment for a low cost.
- You have the advantage of numbers. You can buy a large volume of stocks and make a profit even when there’s a small increase.
- Most upcoming companies and companies with new technology start off as penny stocks; this gives investors the opportunity to become a shareholder of what could turn out to be a multi-bagger.
- Penny stocks are ideal for day trading and short term investments. So your money wouldn’t be locked for long.
How To Trade Penny Stocks?
- As far as penny stocks are concerned, the shorter the duration of investment, the better. These are ideal for day trading.
- Research is very important especially because penny stocks mostly belong to companies that are not required to disclose as many details as large cap companies. You’d need to create a list of penny stocks to watch and observe the accounts of the companies involved. Avoid buying shares of companies that have borrowed heavily or that have been involved in scams or fraud.
- Keep a watch on hot penny stocks and buy when the price is down.
- Don’t rely solely on tips or emails that claim to show you the best penny stock to invest in. Be well informed and keep a watch on the stock before you decide to invest in it.
- Canadian Penny stocks have high demand because lots of new companies that introduce new technology have sprung up and most of these shares are launched as penny stocks. Penny stocks from Canada are famous throughout the world because the country is known to encourage young companies that pioneer innovative technology. You can buy Canadian penny stocks through a broker who’s authorized to deal in such stocks.
- Keep watching for penny stocks that have a sudden increase or decrease in volume of trading. This could mean there’s some news that can affect the price of the stock.
Don’ts
- Do not invest more than 10% of your portfolio in penny stocks.
- Do not hold penny stocks for long; exit when you’re in profit. They’re best for day trading.
- Avoid penny stocks that have suddenly jumped up without any news to back the increase. Such stocks may be manipulated by market players.
- Do not invest using borrowed money.
- Penny stocks are ideal for young investors who can afford to speculate with money. Don’t invest in these stocks if you are a conservative investor.
