How to Invest in Penny Stocks

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What are Penny Stocks?

Penny stocks are company shares that trade for less than $5. Most of these companies are highly-rated for small-time traders or new investors in the stock industry. These stocks were less than $1 some years back, but now their minimal value increased to $5.

Trade can find some of these stocks on leading stock market platforms, including the New York Stock Exchange (NYSE), but they all trade with over the counter (OTC) platforms.

You can also invest in these penny stocks with privately-owned OTC Market Groups that grant minor ownership in these stocks. Note that the prices for these penny stocks vary for each country.

 For instance, the minimal stock value is $5 in the U.S., but the U.K has penny stocks worth £1. These penny stocks usually have a market capitalization limit according to your location. The U.S. has a $250 to $300 million limit for these penny stocks.

The U.S. Securities and Exchange Commission (SEC) defines penny stocks as ownership in companies trading their shares for less than $5. These shares may also include claims from companies that may be inactive in the trading market.

These stocks are the smaller chunks of the market, allowing almost anyone to invest businesses for dividends and trading profits.

List of Penny Stocks

Following are the top penny stocks that you should check for your next penny stock investment.

• Acorn International Inc. (NYSE: ATV)
• Bankers Resources Inc. (NYSE: BSQ)
• Bison Capital Acquisition Corp (NYSE: BCAC)
• InfuSystem Holdings Inc. (NYSE: INFU)
• Galectin Therapeutics Inc. (NASDAQ: GALT)
• Mako Ventures Inc. (NYSE: MAKO)
• Prothena Corporation PLC (NASDAQ: PRTA)
• SilverCrest Metals Inc., (NYSE: SILV)
• Telecom Argentina (NYSE: TEO)
• U.S. Gold Corp. (NASDAQ: USAU)

Are Penny Stocks a Smart Investment?

Penny stocks have been an essential part of the stock market, considering many people invest their money in them. Many movies in Hollywood have also highlighted the potential of these stocks through their structured storytelling. The question is, are penny stocks a smart investment? 

There is much disagreement when it comes to investments in penny stocks. These penny stocks usually belong to troubled companies, which may or may not soar up in the future.

In addition, many fraud cases with these penny stocks register, where companies use the classic pump and dump scheme to lure investors in and then pull out their investments.

Historical records show that in some cases companies might falsify their financial figures or make unrealistic claims just to attach more investors to buy the company’s stock.

Dealers hype particular stocks, affecting market trends as everyone starts investing in the stocks only to learn that they don’t yield sufficient profits.

Anyone still holding the stocks ends up losing almost all their money. So, the key question that most might ask is whether it is better to stay away from penny stocks. Investors think that it all depends on personal circumstances, investment goals, and company fundamentals.

You can easily find many penny stocks with good market value and prospects. Depending on company technicals and fundamentals some penny stocks historically showed that they could offer relatively high returns.

Nevertheless, it is essential to know the market trends, penny stock risks, and various factors to reap the full benefits of penny stocks (more on this ahead).

How to Find Penny Stocks?

Penny stocks have their risks, but there are ways to invest in them if you still want to do so. However, trading on major stock exchanges requires more than just money in your pocket, and investors need to meet multiple listing requirements before investing.

For instance, if you plan to invest through NASDAQ, you have to maintain a minimum bidding price of $1 according to Nasdaq Rule 5550(a).

Investors can access stocks that valued less than $1 through the OTC bulletin board and the pink sheets. Note that the pink sheets are a risky penny stocks investment since they are unavailable at the SEC.

Selecting a Penny Stock Broker

Investors need a stockbroker when they want to trade penny stocks, but the broker fee is a significant concern. Some of the experienced investors share that being charged per each stock trade might drain your return potential.

So those investors highlight the alternatives that are available in the market which are brokers offering flat fees.

In addition, the broker’s experience and expertise are essential considerations before investing in penny stocks.

Additional Charges

One of the biggest concerns for penny stock investors is the additional charges they have to pay. A transaction fee is an excellent example because penny stocks have a lower value than higher market stocks.

Consider trading a penny stock for $0.10 and expecting the stock to double after some time. Your profits will effectively reduce, although one might assume good gains from a price increase to $0.20. One of the aspects that investors generally look at before choosing a broker is the fee structure.

How to Find Penny Stocks Before They Explode?

Penny stocks are highly volatile, and penny stock investors need to have a clear strategy. It is challenging to know when the market changes, but there are some signs you should lookout for. These include the following:

Look for the Hype

Penny stocks have high volatility because of their low share prices. Minor changes in the market trends can significantly impact their collective price. In the recent decade, social investing has gained some popularity which means that part of the investment community looks at the market trends and hype when making investment decisions which also applies to penny stocks.

For instance, if a celebrity invests in a penny stock, it will increase its value. Understand the difference between actual news and social media buzz because social media buzz can help create organic growth. However, the local news stories can fade out quickly.

Watch the Trading Volume

The trading volume of a penny stock over a long period can help you determine its possible future. Try to look at a six-month or annual window, as it will provide you with a baseline for the penny stock performance.

 An increase in the trading volume represents positive changes because more volume means more penny stock investment. The social or hype investing community accepts the rule that if everyone is selling the penny stock there is no need to buy it.

Recent Moves and Changes

Top percentage gainers could mean that the penny stock prices could increase soon. Try to invest in the penny stock during the first or second wave of the stock purchase. Dividends are commonly regarded as additional income that investors can generate to boost their investment returns.

How do Penny Stocks Work?

Penny stocks work precisely like any other stock options in the market but have a higher risk factor. These stocks usually have low market volume and come with digital dealing options as they do not have the floor on the primary market. Brokers working with penny stocks offer discounts on dealing with them in hopes of picking the right penny stocks and earning more.

The penny stocks are hazardous because they are not a part of the mainstream market, and investors do not have sufficient market information, so their investments are less liquid. Every stock has its risk, but penny stocks are arguably the riskiest ones.

 Making good trading moves because of little information can complicate things. What makes things even more difficult is that the info available does is not credible because the penny stocks are not registered register with the SEC.

Nevertheless, penny stocks are a good investment option for those who understand their risks. It is essential to assess each price-changing factor individually before making a final decision.

How to Make Money on Penny Stocks?

In general, the market agrees that finding a valuable penny stock might be more difficult and require more time and research. These stocks have low liquidity, smaller volume availability, and a shorter trader base. Nevertheless, as discussed previously, some penny stocks performed well historically. Some investors share their experiences on steps that they follow to identify potentially profitable penny stocks.

Highlighting Patterns

Penny stocks follow a pattern, but these patterns form after a long interval of consistent price. The trend can decrease over multiple months and go sideways for a few weeks. One of the points that penny stock investors highlight is the combined occurrence of a sideway trend and overall market surge which might support penny stock price recovery.

Price Dips

Finding penny stock investors is very difficult and requires dealing with volatility because of an even split between traders. The share price can dip if the traders increase compared to the penny stock traders. A stock that drops in value quickly without any reason could represent a dip pattern, which is the perfect investment opportunity.

What some market participants are trying to do is to buy the dip which means buying when the stock prices are falling in order to participate in the gains from stock price reversal.

Top out Pattern

A top-out pattern is the exact opposite of the price dips mentioned earlier. It is when shares keep climbing and then start following a sideways trend in the market. The sideways movement is usually a short break in the market trend before the stock increases in value. However, penny stocks typically experience a dip after these market changes. So the key challenge put through by the market participants is to identify the dips or entry points and then the highest or the exit point to maximize the return potential of the investment.

Share Consolidation

Share consolidation is when a company increases its stock value by merging stocks, and it is when the stockholders turn over and represent a possible price increase. That said, investors with little patience can get frustrated and may want to trade their stock. 

The penny stock usually tracks sideways until it starts increasing in price, and the traders keep pulling out until only a small group of investors are left. The next stock move impacts the price considerably, and trading on increased stock value becomes easier.

How to Day Trade Penny Stocks?

Significant price changes with penny stocks hardly happen, so investors need to focus on day trading on same-day trading. Following are some steps to ensure you trade at the right time.

Ignore Success Stories

Penny stock investors come across many success stories related to penny stocks. However, they must learn to say no because most of these stories are either lies or plain luck. These penny stocks are volatile, thus thorough research is required before trusting any platform with earned money.

Keep an eye on the Warnings

Most penny stock investors trade their stocks more than they trade them because most newsletters, social media accounts, influencers, and other sources of information do not tell the truth. They want maximum people to invest their money in stocks to boost their market value, but it doesn’t work.

How to Avoid Penny Stock Scams

Penny stocks have many risks involved, and it is essential to know how to avoid penny stocks scams before making any decisions. Here are some tips that every investor must consider

Avoid Unregistered Brokers

Professional investors generally try to do thorough research before believing in some brokerage platforms that offer very low fees, since some of those might be part of a scam.

Re-evaluate Hot Market Trends

It is easy to get caught in penny stock hype as everyone starts rushing to a particular stock, increasing its price. For instance, many people use the blockchain industry for marketing penny stock investments.

Stay Realistic

Investing in penny stocks requires maintaining a realistic outlook toward your investment. Generally, traders agree that being too emotional in the markets might lead one to lose significantly more compared to those who are able to control their emotions.

Bottom Line

Investing in penny stocks can be quite risky, but those who understand the market trends should invest in them as much as possible. That said, performing own due diligence before choosing a brokerage platform or making any investment is regarded as the best market practice for any investor.

Conclusion

Penny stocks are low-priced shares of small or troubled companies that trade for less than $5. While they offer potential for significant profits, they are also associated with high risks and potential for fraud. To succeed in penny stock investing, it’s crucial to conduct thorough research, understand market trends, and choose a reliable broker. Day trading penny stocks requires a strategic approach and awareness of potential scams. By staying informed and maintaining a realistic outlook on your investments, you can navigate the volatile world of penny stocks and potentially reap the rewards.

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