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 in these penny shares can risk whole investment as there are chances of these stocks getting de listed on the stock exchanges.
Despite the extreme risk, these stocks are always in 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 a matter of just a couple of months.
Considering these are different from blue chip stocks and move irrespective of market condition, different things need to be considered while picking the best penny stock out of the lot.
These can be:
- 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 /clearing-penny-stocks-myths/
- Analyze Current events and News: The world follows globalization and stock market actions have become spread internationally. News and events for any specific industry affect the stock price of a 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.
- 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.
- 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 doesn’t sell their holding even after the target had been achieved. Most of the penny stocks are a trap where after a good sock price increase, there is a free fall. So never love the stock, only trade.
- The 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 an 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.
- Evaluate all possible Options: An indispensable 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. The 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.
- Stay with your Investment guidelines and use Stop Loss: The penny stocks are a risky trade. It is strongly advisable especially in the 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 the 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.
- Never Invest Whole capital in Single Stock: It is the basic mantra to be followed to trade in the stock market, especially in the case of penny stocks. Penny Stocks are risky trades. The investor must not allocate his whole capital into a 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.
- Take advantage of hot trending penny stock markets. One example is Marijuana stocks. They have been a very hot sector lately.