Things to Consider While Picking Penny Stocks

Penny stocks are different from other small and big category stocks. They differ in perspective of capitalization, trading volumes and volatility in price movement. The penny stocks have low market capitalization, low trading volumes and extreme high volatility makes it risky trade for an investor. They can show large moves either direction in their stock price irrespective of the market. Trading into these penny shares can risk whole investment as there are chances of these stocks getting de listed on the stock exchanges.

Despite of extreme risk, these stocks are always on the trading and investment radar of trader and investor as they have potential to give huge returns. The returns can be so huge that it can get double or triple in matter of just couple of months.

Considering these are different form blue chip stocks and move irrespective to market condition, different things need to be considered while picking the best penny stock out of the lot.

Things to Consider While Picking Penny Stocks

These can be:

  1. Learn everything before Investing: Investors are advised to give proper time for research in picking the penny stock for investment. There are many constraints in doing it include lack of information on financials, no history to analyze etc. In fact there are many fraudulent and misleading statements available to trap the small investor. Alongside analysis, investor must safeguard himself from misleading information.you can read some myths about penny stocks at http://realpennystocks.com/clearing-penny-stocks-myths/
  2. Analyze Current events and News: The world follows globalization and stock market actions have become spread internationally. News and events for any specific industry affects the stock price of company of similar industry. Investors should closely monitor and analyze the current news and events as they happen and take investment decision pertaining to that sector’s stock accordingly. This can help choosing better stock and improve the chances of getting profits.
  3. Never Pick the Stock Based on Emails and Newsletters: Various fraudulent ads and news about companies are spread through newsletters, emails and SMS’s by operators to masses. This is done to manipulate the masses to buy the stock and trap them in pump and dump schemes. Investors are strictly advised to avoid these fraudulent free newsletters, emails and SMS advising them to buy the small company stocks. Once the stock price is artificially increased they are dumped at high prices, trapping the small investors.
  4. Never use Emotions while Choosing and Trading Penny Stocks: Choice of stock should be based on solid research and analyses and not emotions. Penny stocks are so risky that one wrong choice and trade into penny stock can dump whole investment. Many people get emotional with some stock that is giving him good returns and don’t sell their holding even after the target had been achieved. Most of penny stocks are a trap where after a good sock price increase, there is a free fall. So never love the stock, only trade.
  5. Industry is Important: The stock performance is positively correlated to company’s business performance. No company survives in isolation, rather is a part of an industry. It is important to study the company with industry’s perspective. Explore news on industry which can have an impact like Government policies, global factors, natural calamities etc. This news can ultimately impact the stock performance. A proactive approach can help getting good profits.
  6. Evaluate all possible Options: An indispensible requirement while trading a final decision on anything is to evaluate all possible options. Likewise before getting into penny stock trade, list all possible options and evaluate them carefully. Options are required for comparing and choosing the best among the lot. Stock may look good when analyzed individually, but not the best when it is evaluated with other options. Use penny stocks message board, forums and reputable websites to locate new offerings in this type of market.
  7. Stay with your Investment guidelines and use Stop Loss: The penny stocks are a risky trade. It is strongly advisable especially in case of these penny stocks to stay with your investment theme. If an investor has thought of any upside target, he must sell the same on achieving it and shall not greed for more upside. These stocks often fell sharply after a rise as in case of pump and dump schemes. At the same time he should also keep a strict stop loss in order to minimize his loss on capital.
  8. Never Invest Whole capital in Single Stock: It is basic mantra to be followed to trade in stock market, especially in case of penny stocks. Penny Stocks are risky trades. Investor must not allocate his whole capital into single stock, rather diversify his portfolio. It is a very popular saying ‘Don’t lay all your eggs in one basket’. He should also consider the opportunity cost of investing into another stock and quick enough to switch to next best possible opportunity.
  9. Take advantage of hot trending penny stock markets. One example is Marijuana stocks. They have been a very hot sector lately.

Clearing Penny Stocks Myths

We all as a human being have myths about something or the other. It is basically the assumption about something about which we actually don’t know and when we realize the reality, we come to know that the assumptions are all false.

The same is with penny stocks. General public have various myths about penny stocks, in fact they have a bad first impression and are ignored. The purpose of writing this article is to clear the myths about the penny stock trade and get into the reality mode.

Below are some myths that overshadow the penny stocks:

Clearing Penny Stocks Myths

  1. Penny Stocks Investment will end up Losing Whole Investment: This stems from the belief that penny stocks are very risky trade. It is true that penny stocks are risky but investment in share market in any category stock involves risk. It also applies in any kind of business. Success is achieved when a businessman minimize the risk. Same applies with investing in penny stocks. Investor should act smartly to minimize the risk of trading in penny stock by choosing the stock with correct analysis.
  2. There is not enough Liquidity in Penny Stocks: Many people feel like that penny stocks have very low liquidity. Liquidity simply means enough volumes so as able to buy and sell shares easily. Low liquidity on any day means less traders trading on that stock. However huge amount of trades means more traders buying and selling the stock.
  3. It is easy to make money out of Penny Stocks Investment: The calculation looks easier but it is not that easy when it comes to practicality. Only 20 cents increase in $1 per share gives 20% profit but if it would have been this much easy, there would have been lots of millionaires. However it is rewarding for those who make proper analyses to find that gem of a stock.

Penny Stocks: Popular Wicked Schemes to Avoid

Making easy money is really not possible in this world. If you find something to make out easy money, remember there must be some scam artist attached to it. It is surely going to be a risky bet.

Penny stocks have the potential to prove huge and quick gains, but it comes be a high risk proposition to your investment. These stocks are also prone to scams as these stocks are out of the scope of regulations of SEC and most of them are traded on pink sheets.

There are lots of scam artist playing into the market to make money by cheating the small investors. Below are popular scams associated with penny stocks trade:

Penny Stocks: Popular Wicked Schemes to Avoid

  1. Scam Spam: The most popular variation of pump and dump scheme scam is Scam Spam. The penny stock prices are artificially inflated from lower levels just for purpose of trapping the small investors. It is prominently done through false and misleading statements on media, free newsletters, emails and SMS etc. later they are sold or rather dumped at higher prices to investors.read more information about penny stocks myths by clicking here
  2. The Short Scheme: This is very cleverly done by the scammer. The fraudster heavily short sell the stock, making small investor feel it’s not worth holding this stock. People dump their holding and fraudster quickly buys all the shares and ultimately pumps up the stock with positive hypes. This is done where the fraudster knows some good news in cooking into the business or may be positive about company growth in future.
  3. Fake News: This is another attribute to popular pump and dump scheme. The promoters of these penny stock companies are also misleading by giving fake press releases on popular TV news channels, newspapers and on websites. Fake positive news is released to mislead the masses to buy that particular stock and artificially increase the stock price.