Many people read stories on how someone has become rich by simply buying penny stocks at the right time. After all, these stocks are priced so low that people are bound to make money from them. The problem is that penny stocks can provide a high reward, but they are considered very high risk.
Evaluating A Penny Stock
Investors often believe that every company that enters into the stock market started as a penny stock. This is a fallacy that causes investors to believe they are seizing the moment and lose a fortune in the process.
Many companies enter into the market at a high price. This price is predicted based on the company’s current operations. Facebook is a great example of this. While the initial price of their stock was horribly overestimated, the company was still making a lot of money. The same could be said for many private companies that decide to go public.
The best stocks are not judged off of what they offer. If a company is in the penny stock range, the company is not making enough revenue. The key to evaluating this stock is to see what the company plans to do to go from potential to success. This is how to invest in stocks wisely. Research must be done on part of the investor buying penny stocks. There are stocks that can be purchased today that will rise, but you need to do your due diligence first.
It is far too easy to buy stocks online. In fact, many people buy stocks that they know nothing about because they are on the rise. With charts and the ability to watch the market in real-time, investors have become lazy. This means that the idea of risk management has been all but removed from the equation. If you value your money and want to know how to trade stocks correctly, you must learn risk management.
Research: Begin researching the company first. Learn about the company’s history, the market they are catering to and their management.
Operations: How well is the company run? Since there are less regulations on penny stocks, this can be difficult to discern. Companies that put out reports are trying to move up to the better stock exchanges. This means they will divulge their operations and finances.
Profitability: Learning about the company’s finances is of the utmost importance. Even the great Warren Buffett states that a company’s stock price must meet their revenues. If Warrant Buffett does not see how a company will be profitable, he passes. A great example of this would be Internet-based companies. While they may be valued highly, many are running off of seed money and not turning a profit.
Markets: If a company is in a market that is simply not needed, they are not a good choice. There must be room for expansion and growth in a market.
Now once the initial research phase is done, you will have lowered your risks greatly.
Stocks should be avoided if:
Cash flow is not increasing yearly
Revenues do not exceed 10 million
You do not understand the company’s industry
There are stocks in a variety of price ranges. The issue with penny stocks is that there is no distinction of what a penny stock is in terms of value. Some base a penny stock being a stock that is priced under $1. The Securities & Exchange Commission bases all stocks that are valued at less than $5 to be a penny stock.
A broker is needed to initiate trades. These brokers can be found online and virtually all brokers offer a demo or free trial of their platform.
These platforms are quite advanced and the true value comes from the charting and graphing offered. The must-have features include:
History graphs of how a stock has performed to date.
Graphs showing current market fluctuations.
Charts showing how a stock is performing.
Real-time statistics to correctly analyze the market.
Now it is up to you to determine which stocks to buy. The goal is to know when to sell. Many investors will choose to sell at a 50 percent increase, not unrealistic for a penny stock, or when a loss is more than 10 – 20 percent.
Penny Stocks to Watch
There is nothing wrong with the idea of paper trading to learn the basics of buying penny stocks. This involves trading, on paper, so that no money is lost in the process. The current penny stocks to watch include:
These are all stocks that would meet the requirements of the SEC’s definition of a penny stock. While priced higher than a $1, these companies have shown great potential for positive growth.
Start buying penny stocks a little at a time. You want to only trade within your means and learn from your initial mistakes. Once you understand the basics, it will be time to begin diversifying your portfolio and doing technical analysis.
Falling in love with your penny stocks is a bad idea. Instead, you want to follow a strategy wherein you are able to reap profits, but not unrealistic profits. Some strategies boast 1,000 percent gains, but the losses can be just as devastating. Instead, follow a smart strategy and seek gains between a more realistic ROI of 20 – 30 percent.