Penny Stocks are defined as stocks that trade under 5 dollars. Investors with an understanding for high-risk like to turn to penny stocks. Lower-priced stocks allow people to get involved with a public company with only a small amount of capital. Some penny stocks are traded on regular exchanges such as Nasdaq, but generally, penny stocks are mostly traded on over-the-counter markets (OTCs).
These OTC penny stocks can be less regulated than other stocks that trade on higher exchanges. In fact some penny stocks do not subscribe to SEC filings in general but elect to simply submit information to OTCMarkets.com directly as a source for publicly available information. Despite the risks involved, if penny stock traders choose the correct penny stock to buy, the outcome could be beneficial to the holder. Here are a few ideas to think about as you go on your search to find the best penny stocks to buy:
- Limit holdings and diversify your portfolio: Make sure to protect your overall portfolio. No one ever got rich by investing 100% into a basket of losing stocks. Many penny stocks, due to their risk, can often times lead to large losses. Though some can hit it big, a portfolio made up of only penny stocks can lead to major losses. It’s important to include risk in your plan for potentially large gains but limiting your risk can help protect your initial investment. Some prescribe to the idea of limiting your holdings in penny stocks to no more than 1% or 2% of your overall portfolio. It also makes sense to diversify your penny stock portfolio, which some say shouldn’t exceed 5% to 10% of your overall portfolio, depending on your risk appetite.
- Check the trading volume of stocks: Even if you’ve come up with a sound investment idea to trade certain penny stocks, you’re going to need to be able to sell your shares in order to make a profit. Obviously a stock that trades with higher volume could be capable of offering easier exit when it comes to this scenario. Otherwise, you may wind up in a situation where there are few buyers and a wide spread in price related to bid price and ask price, which could make it very hard to see the gains that most investors desire in a short-term time frame.
- Know when To Exit: Penny stocks are generally short-term trading equities, remember that the only time you will actually make money is when you sell. If you realize larger gains over a short period of time with a penny stock, remember that selling them now rather than waiting for bigger profits that may never happen, isn’t a bad thing. Sure everyone wants a “home run” but then again making 10,15, or 20% on a trade is better than expecting 100% and seeing your investment go to 0.
- Quality of Penny Stocks: So with this topic, we point out that some penny stock companies are worth more than others and we aren’t talking about market cap but actual fundamental analysis. It’s one thing to say a company has a billion dollar market cap but if the company has 0 assets, a negative cash flow, and has never turned a profit, that actual market cap value may simple be due to whatever the current share price is multiplied by its about of shares outstanding. It is always good to invest in what you know as well as doing your due diligence prior to making any kind of investment….so do your homework before investing and don’t find out bad news after making a random guess.