How To Invest In Penny Stocks

Lets face it. Penny stock investing is a risky business. Beginner traders like to invest in cheap shares, and they get burnt rather quickly. Here are some of the most common steps proposed by experts on how to invest in penny stocks online in a sensible manner.

Learn how to invest in penny stocks

Penny stocks are low priced stocks, generally stocks under 5 dollars. In case youre thinking about investing in penny stocks, it’s a good idea to understand the dangers before you wager your hard earned dollars on a portfolio of stocks.

The lack of information is especially risky. Penny stocks arent necessarily traded on the stock exchange. They dont need to file with the SEC, which means they arent publicly scrutinized. They are blind bets, or – even worse – straight out loosing bets.

On the biggest exchanges (NYSE, NASDAQ, AMEX) there are strict standards that penny stocks need to satisfy to be listed. But on smaller exchanges (like OCTBB) no such standards exist. This means that there is no added safety between the sellers and the traders.

If you want to invest in stocks, you need to make transactions. Penny stock brokers offer easy access to low priced stocks, with small commissions and minimal fees.

Verify that your online brokerage account gives you the data that you need about stocks, to help you settle on the best choices. The best broker for penny stocks provides charts, price histories etc. to help you in creating the portfolio most suitable for you.

Dont believe the hype

Penny stocks have been a playground for scammers for quite a while. Dont let the charm of fast cash make you an easy target. If you get an email suggesting a specific penny stock, check the disclaimers whether the promoters are being paid to advertise. If they are, stay away from that stock. Keep in mind: great stocks are held secret by the experts, not advertised in newsletters.

Pump-and-dump is a technique that scammers use to make easy money. They invest heavily in a microcap stock, building it up utilizing questionable business practices, and then finding buyers who are ready to buy it from them.

Do as much research as possible to make sure that you are putting your cash into the best penny stocks, which are undervalued with the most potential for growth. Ask yourself: is this stock at its 52-week high because of amazing business practices, or because it has recently been selected by a few newsletters?

Dont let company leaders do your work for you. Many penny stocks are scams created by insiders to reap benefits, not established companies with robust business practices. Then again, low cost stocks are often superior to large company stocks. Few other investment vehicles offer the possibility of turning a small amount of capital into a fortune. Unfortunately, the number of low-quality penny stocks outweighs the good ones by almost twentyfold. The trick is to avoid those bad stocks and instead find the top 5% that will be profitable.

Dont short penny stocks. You may think you can cheat the scammers by shorting penny stocks proposed by them; however its really not a good idea. Its easy to lose a significant portion of your investment in a single squeeze.

Pay special attention to warning signs

Make sure that available penny stocks are traded over a regular exchange and not as OTC. Over-the-counter stocks dont require the same regulation as bigger stocks, and that can create extra risk. So choose penny stocks only from the most reputable exchanges, like AMEX, NASDAQ, OTCBB, NYSE, or even the Canadian stock exchange.

Another unsafe type of a penny stock is a major company where the share prices slowly shrink away to a very low dollar value. Investing in some of these companies may still be a decent choice, but when an organization is dangerously near liquidation, it may not be a good idea to invest in it.

Without a general strategy for trades, you cannot be successful at investing in penny stocks. Consider these methods:

Sell quickly strategy: dont get greedy. Consider selling when you can made 20-30% profit on your initial investment.

Buy and hold strategy: Choosing cheap stocks and keeping them in your portfolio waiting for their price to increases significantly is usually a losing proposition. Set your take-profit goals!

You have to learn how to buy penny stocks. It is often hard to find a buyer for them. You may need to bring down your asking price until it is no longer profitable to sell.

Stocks that trade at least 100,000 shares per day are the only micro-cap stocks considered liquid enough to be traded safely. If you own a low-volume stock, it might be hard to get rid of it when you want to. Also, stick with stocks that are at least 50 cents per share.

Never get so attached to a stock that you fail to consider the possible benefits or drawbacks. Stocks are about profits; and if you are not making any profits on a trade, close it.