Would you still like to give it a try? The following are some useful tips for investing in penny stocks.
Understand That You Most Likely Are A Speculator, Instead Of An Investor
If you are purchasing penny stocks simply because they are inexpensive or you receive a “hot tip” from either an email or newsletter, then you are a speculator. What that means is you are in these stocks to make quick profits, instead of holding them long term. If you get a fast pop, then usually the best thing to do is sell it and them move on, since over time many penny stocks will go down to zero.
By contrast, investors have a tendency to purchase higher-price stocks due to companies having been strong performers over the long run. That gives investors the luxury to take a buy-and-hold long-term approach, since they are investing for several years, and sometimes even decades, instead of speculating.
Start Out Small
If you want to start buying penny stocks, make sure to start out small and move very slowly. Penny stocks should only a fraction of your overall portfolio. They should ideally represent 10% or less of your overall individual stock holdings while you are learning how they work, what the potential pitfalls are and what you need to do to remain safe. There are a lot of scammers out there who might attempt to fleece you.
There are two typical scams that penny stock fraudsters like to pull. “Pump and dump” is the first one. An individual shareholder or company may hire a promoter to mail newsletters and send emails hyping a stock, in hopes that it will push up the price. The newsletter may make big promises about the future of the company (‘the pump” or their products to get investors all excited. Once the stock increases in price due to increased demand, the company or individual will sell a lot of the stock for a profit (the “dump”_, which will cause the stock to drop in price ultimately.
Then there is the reverse of the first scam, called “short and distort.” With this type of scam the stock will be “shorted” by the promoters – essentially betting that the stock is going to drop in price – and then attempt to push the price of the stock lower through posting negative news and comments about the company. The scam might enable short-sellers to profit on the stock that is declining in price.
Check On The Volume
You don’t make any profits until your position is closed. If you own a penny stock that skyrockets in price but you are unable to sell your holdings, then you won’t be able to take advantage of the higher price. Before you purchase any stock, determine what the daily average trading volume is. Any reputable website tracking stocks will report that number.
The higher that the daily volume is, in generally the easier it is to sell it. If 1,000 share of a stock are traded on a daily basis, and you own 10,000 shares, then on average it would take 10 days for you to sell all of them – if you were the only one selling them. If a stock spikes, you may not be able to sell them in time to obtain the high price. So stock with modest amounts of share so you can sell them within a reasonable amount of time.
A majority of your nest egg should be left in sensible, safe long-term investments such as the Standard & Poor 500 index fund. Those funds are very easy to purchase and offer the strength of the best companies in America to your portfolio, to balance the risk you taking on the penny stocks you are investing in.
Be Ready To Do Research
Just like with regular stocks, you need to read financial filings, that you can get from the company directly, or from the SEC (Securities and Exchange Commission). If there are not any financial statements that are available, that is a big red flag. Pass over that penny stock and look for a different one.
When conducting research on penny stocks, you have to sort out lots of hype from what the actual reality is of the situation, this will help you find the best penny stocks. That means you need to have real knowledge on the industry obtained from outside sources, instead of from the company only. Management frequently engages in “puffery,” attempting to raise the stock price so that they can sell it or more stock can be issued to keep the company going.
Avoid Surcharges On Penny Stock
If you are purchasing penny stocks, typically you are purchasing a big amount of inexpensive shares. There are some brokers who add surcharges to stocks that are priced under a certain level and then charge even more when you trade more than a certain amount of shares.
You don’t have to put up with these types of restrictions. Instead, search for a broker that has no volume restrictions or surcharges, and one where you can trade penny stocks the same way you would with regularly priced stocks. The top brokers have been reviewed and rated by NerdWallet for penny stock investors, which can help to minimize your trading costs.