Tips to help you invest in penny stocks
by: DanielleSaige
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It may sound surprising, but there are many people who are actually making money by investing in penny stocks. Penny stock is a stock that has very low price, may be in pennies. This type of stock is very popular among investors because if the price of penny stock rises, then the investor can earn a lot by just investing a little. But, this involves a lot of risks and contains rewards at the end.
These small stocks trade for under $5 a share and trade on the markets like NASDAQ, Pink Sheets, SmallCap, Over The Counter and the Canadian Venture Exchange. Basically, these kinds of investments are highly speculative as they are mostly start up companies without any good history of available information. That means, you cannot scrutinize the start up company with any established company. This is what makes them attractive to traders.
Here are some steps to consider before you invest in a penny stock:
- When you are starting your investment, you cannot do it without a broker because you have to open an account, only then can you be able to trade. Analyze the different discount brokerage houses because they are the one to offer the lowest per trade costs. The process of opening an account can take up to 5 business days.
- Before investing, you need to know or get familiar with trading terms like volatility, market capitalization, technical analysis, open order, margin, company life cycle, fundamental analysis, limit, acquisition targets, economies of scale and many more economic terms. Get yourself acquainted with as many terms as possible and then get into the business.
- Be sure what you want, whether you want to have fun and want to gamble or be a regular trader. If you seriously know about the type of investor you are and your goals, then penny trading will not be a tough game.
- The amount of information available on this type of stocks is very little, so you need to do lot of research to get full knowledge about them. The first thing you need to do is identify the stocks by looking at the revenues, debt levels, increased earnings, press releases and management. Also look at the spikes and dips in the stock price. Another very important aspect you need to look at is insider trading.
- Become a member of a forum or a newsletter or any investor clubs. Check out the stocks that are being discussed about in these forums and then do your own investigations about them.
Signs of danger to look for in a penny stock
There are many investors who have indulged into investing without even giving a second look on the danger signs and ultimately landed in huge loss. So, if you want to make some profit out of your investment, then it is your responsibility to make sure that you have proper knowledge about the financial status of the company you are investing in.
If the company you are investing in has shown a decline in quarterly incomes for two quarters or more, then it is a sign of danger. This may happen due to many factors like management crisis, change in the management team, wrong production decisions and many other factors. In such cases, the company will borrow dividend to remain firm. You as an investor have to look for the income sources of the company in order to trade safely. Again, you must never invest in companies that have just rebound after a period of decline in quarterly earnings. Study the records of several quarters before you take any decision.
When you are investing in the market, never come with the intention of gaining huge profit in the first go. You should aim for long term investment for future benefit. Mostly, investors fail because they don’t have the patience to wait for the profit.
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