Traditionally, a penny stock is considered to be any stock that sells than $5 per share and is traded in a bulletin board quotation system. Someone consider a true penny stock to feature in less than $1 per share. Also, stocks trades in larger market like NASDAQ that are less than $5 per share are also considered to be penny stocks. NASDAQ penny stocks offer some advantages over traditional ones, while they also come with many risks.
1. Pay attention to trading volume.
A big problem with traditional penny stocks is low trading volume or insufficient demand. The term trading volume refers to the number of stock shares sold in a period of time, most often per day. With a very low trading volume, you will not be able to sell or buy a particular penny stock when you want. The trading volume of NASDAQ penny stocks is higher than that of the bulletin board stocks, however it can still be lower than for larger companies that are traded for higher stock prices. Thus, before you invest in a penny stock, you have to check its trading volume history so that you will know whether there is enough activity to buy or sell whenever you want. It is highly preferable if there are hundreds of times more share traded than your needs.
2. Seek information and know the stocks.
If you are unfamiliar with a company or an industry, you’d better not to invest money on them. Because a lot of stocks on the NASDAQ are technology focused, it is important to understand computer and technology industry prior to your investment in NASDAQ penny stocks. It might be difficult to seek information on traditional penny stocks, however, NASDAQ penny stocks might be stocks of well-established companies that are lacing of luck and you should be able to find plenty of information about them.
3. Work out a plan and stick to it.
Penny stock investment is an activity involving high risk and high reward. At all times, you should not devote large percentage of your portfolio into the penny stocks and you will need to develop a specific plan in place to pull out your money when possible. Penny stocks are highly volatile, especially for those with prices much less than a dollar. For example, if there is a stock with a 20 cents price per share, it could lose up to 5 percent of its value in a single day, just be falling 1 cent in its price. Due to the high volatility, it is a good idea to determine ahead of time on the conditions at which you should pull out your money, then you just stick to the plan. For an instance, you may want to sell a stock when its prices drops more than 20 percent, or it goes up more than 40 percent. Certainly, you will not want to sell a stock with rapidly increasing value, hence you might wish to set a condition that you will not sell a stock that has been increasing consistently unless it loses some percentage of its peak value.
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