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.
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:
- 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.
- 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.
- 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.
Some more popular wicked popular among penny stock that need to be avoided are as follows:
- Free Penny Stocks Newsletter: There are numerous free penny stock newsletters available in the market. Unfortunately most of them are misleading and are major source of pump and dump schemes. It is simple to understand that one, who is expertise in giving top stock picks, will never provide them for free. It is a highly specialized skill and requires lot of efforts to pick the best stock out of the lot.
- Pretending to Provide Insider tips in Forums: Forum is a good place for traders to interact. They become a part of the community and share their respective ideas about share market investment. Investors especially the small one, need to be cautious as there are companies who have hired professional to hype stocks in forums. These professionals are well paid hired consultants and they know how to make story sound and believable with fake press releases.
- Miss-Dialed Message: This is a new version introduced by fraudsters to miss guide the masses. Here you will get a message from any stranger, leaving a message of a hot tip and pretending that this message was for someone else. It reality, it is trap, where in the message of hot tip have been conveyed to generate buying among masses so as to artificially inflate the stock price.
- Reverse Mergers: Often it is seen that private company in order to get publicly traded without any hassle and expense, gets itself merge with public company. This is also done by that private company to falsify their earning and get their price inflated. Investors need to be cautious and should properly review the business history so as to detect ant spotty activity in the merger. here is a good post to read more about Penny Stocks Popular Wicked Schemes to Avoid
Penny Stocks are low priced traded stocks. They are different from other category stocks in many contexts. The other category stocks being like small cap or blue chip stocks. The points of distinctions are as follows:
- Stock Price: The major difference between the penny and other category stocks is the market price. As name suggest, penny stocks are very low priced stocks, trading below $5 per share. These penny stocks companies are very small sized companies compared to other category companies.
- Risk: Penny Stocks are very risky trades for investors as compared to trading in other category stocks like small cap and blue chip stocks. Penny Stocks are low traded volume stocks with high price volatility. They even have a risk of being de listed from the exchange.
- Rules of SEC: Unlike blue chip and other big company stocks, most of the penny Stocks are not traded on any important exchange, rather on pink sheets. Being traded on pink sheets, they are out of the scope of rules of SEC.
- Market canalization: The penny stocks are small company stocks so as there market capitalization. These stocks don’t have huge capital floating on to the exchange for trading on exchange as that of big and big chip stocks.
- Scams: The penny stocks are always on radar of the fraudsters, so are more to scams and hence a trap for the small investors. These are easily prone to scams because they are outside the scope of SEC, with no strict rules and regulations and non-transparency.
- Information Available: Unlike blue chip and small cap stocks, the penny stocks are not popular stocks. The information regarding its financials, press releases are not easily assessable on TV news channels, internet and newspaper etc. Investors have to work hard to get news on penny stocks.