Generally, penny stocks refer to stock shares that trade for less than $5 via an over-the-counter service such as over-the counter bulletin board or pink sheets. Penny stocks are usually shares from new and unproven companies that come with potentials of high risks in gains and losses.
1. Basics about penny stocks.
Again, penny stocks are an investment method with high risk and high reward. If you buy a penny stock with one share of 10 cents, just a 1 cent increase in the price gives you a 10 percent net gain in your investment, while in the same time, a fall of a penny leads to a 10 percent loss. Prior to your investment in any penny stocks, you should know the danger of investing in such high-risk investments and understand that there is a good chance that you might lose all or the majority of your capital. In addition, penny stocks are also susceptible to fraud because large investors could dumb plenty of money into certain stocks, raising the stock prices and attracting attention to them, only to dump their shares and pulling a profit, while other investors end up losing money. Given the risk, it is smart not to allocate the majority of your money to penny stock market.
2. Pay attention to trade volume and buy active stocks.
Comparing with big reputable companies on the NYSE, penny stocks don’t trade in that large volume, while some of penny stocks do trade more frequently than others. You don’t want to buy a penny stock and when you want to sell it, you fail due to its low trade volume. Hence, when you are looking at the quotations for penny stocks, pay more attention to their trade volume and opt for those with higher traffic that you can be able to buy and sell when you want to. Once you get stuck with a stock that no one wants to buy, you might never get the chance to retrieve your money.
3. Know what you are buying.
It is very important to understand what stock you are buying and know the business of the company and what value can it bring to the industry. While you don’t need too much effort when looking into well-established companies like Target and Walmart, it does take you a while to know a penny stock company’s history and business. Doing research on a penny stock company enables you to understand your investment and you should not invest if you know little about the purpose of the underlying company.
4. Develop an exit strategy.
Penny stocks should not be regarded as long-term investments. Before you put your capital in a penny stock, you need to develop a plan as to when you should take your money out of the market. One easy way to decide the time of exit is to set limits as to how much you allow yourself to lose or gain before dumping the stock. For example, you may decide to get out when a stock drops by 20 percent or cash out when goes up by at least 30 percent. By setting the limits, you can stop excessive losses and realize your gains.
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