Traders like the idea of investing in penny stocks because of their minimum prices. But the low price also opens the door to large price fluctuations, creating the opportunity for significant profits or significant losses. If you’re planning to become a new stock investor, it’s crucial to familiarize yourself with the essential points you need to pay close attention to before diving in. Being aware of the common pitfalls can significantly limit your losses and bring you to safe investment opportunities.
If you’re planning to become a new stock investor, it’s crucial to familiarize yourself with the essential points you need to pay close attention to before diving in.
What are Penny Stocks?
These equities are considered to be the shares of small companies or startups, the market capacities of which are less than $300 million. That's exactly why they are also known as microcap stocks, where the market capitalization is less than $50 million. Penny stocks are usually traded at the price of $5 or less. While some of the low-cost equities are available for buying and selling on major exchanges such as the New York Stock Exchange (NYSE), you will find most of them being traded over-the-counter (OTC).
Being issued by small companies, penny stocks are known for their tight liquidity and wide bid-ask spreads, so they’re considered highly speculative commodities. That leads to the possibility for traders to face financial losses. Also, low liquidity makes it impossible to find a price that reflects the current market situation.
Trading Penny Stocks
Is investing in penny stocks a good idea? It’s not for everyone. With this kind of commodity, the market participants can turn a small investment into a decent amount of money or just "lose a fight." The main reasons why a lot of penny stock traders lose their investments are buying the wrong stocks and not clearly defining their investing reasons. Usually, they experience such a negative scenario where holding stocks might seem to be a good idea, but that results in even bigger losses.
With this kind of commodity, the market participants can turn a small investment into a decent amount of money or just "lose a fight."
Unfortunately, many traders are ready to buy penny stocks without an in-depth analysis of the issuing company, so that’s where people will likely lose their investments. On the other hand, if the investor focuses on prioritizing quality over quantity and dives into the details, there is a possibility to increase the odds of success and find good penny stocks to buy and sell. Companies with authentic business models are the ones you need.
The reality with these equities is pretty straightforward. If a penny stock costs less than $5, there is a strong possibility that the issuing company experience some financial problems. That’s the price of a stock that signals a potential problem since the traders who are selling it for a low price might have real doubts about the future profitability of a certain company. Usually, a price of a reliable stock is higher than $5 and you will find a lot of them on major U.S. exchanges where they need to "prove their attractiveness."
No, it doesn’t necessarily mean that all equities with a price of less than $5 should be considered as not reliable ones, and those for more than $5 are the ones you should consider buying. It all strongly depends on the market you’re trading in and a company that offers a stock.
Tips for Penny Stocks Trading
Tips for you to consider when buying penny stocks:
- Avoid unreliable companies. Companies that don’t meet the required regulations are highly susceptible to different internal tricks. Remember, maintaining compliance requires meeting certain requirements.
- Consider trading penny stocks with Volume. An illiquid penny stock is a bad sign. The real problem many traders are faced with while trading penny stocks is the lack of liquidity because these stocks are rarely traded. That results in difficulties for traders to find buyers.
- Never fall for "promotional promises" that aren’t supported by the facts. If the company states that "they’re going to become the next Tesla" but can’t prove that by its achievements, plans, vision, and cases. The chance that these are mere words is high.
- It’s time to exit. Enter a trade once you spot a supportive opportunity, and then exit it as soon as you make some money.
- Use a stop-loss order. It’s a tool that stops the losses at the predetermined level.
- Stay on top of things. Read news, forecasts, dive into the analysis of the companies you’re interested in.
You won’t find a lot of low-cost equities in the major market exchanges. It’s considered to be a risky game, especially when you ignore to follow unbiased recommendations and don’t prioritize the importance of in-depth analysis. This is where your risk tolerance plays an important role along with the ability to make considered decisions. Trade penny stocks wisely.
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