They say that everyone who is smart about their finances will start investing sooner or later. There are innumerable ways in which you can invest your money, from the traditional stock markets, through investing in real estate to penny stocks which are one of the most interesting ways to invest your money.
If you have done any kind of research on penny stocks, it is very probable that you have heard from both camps, both from those who say that penny stocks are the best thing ever and those who say that penny stocks should be avoided like the plague. Like it is often the case, the truth is actually somewhere in the middle. So, what exactly are the penny stocks and how does one invest smartly in this market?
Penny stocks 101
Penny stocks are shares in certain type of companies, just as in the traditional stock market; however with some very important differences. The first of these is that the shares of these companies are much cheaper than of those in the traditional stock market. Penny stocks are shares of those companies that are sold for under $5 per share. In many cases, the price of these shares is even lower.
In addition to this, penny stocks are not as well regulated as the more traditional stocks, although there are some regulations in place that ensure at least some sort of security when engaging in this market. They are regulated by the Financial Industry Regulatory Authority and the Securities and Exchange Commission. They are traded on Pink Sheets and OTC Bulletin board.
It is also very important to point out that penny stocks are very volatile, meaning that their value can grow and drop very quickly and very dramatically. Because of this, they are considered both to be very risky and also very rewarding if you trade them successfully. But we will get to that later.
We have already mentioned that penny stocks tend to fluctuate in value more substantially than the more traditional stocks. This is the first danger, as it is not unheard of to lose a whole lot of money in a very short time, without even being able to get out of it in time.
Another danger, or more precisely a liability, is that many penny stocks are not required to disclose as much information as blue chip stocks and other types of stocks. This means that you will have troubles finding enough information on some companies and their stocks.
Finally, there is also the problem of a practice called pump and dump which is a certain type of fraud. They are committed by manipulators and stock promoters who buy huge quantities of certain penny stocks and then artificially inflate the price of such stocks. Then, once enough people have been hooked, they dump the shares and get out before the price drops as was the natural course.
The good news is that there are smart practices that should protect an investor who is ready to apply and who has the discipline to trade in such a volatile market.
The first rule of smart penny stock trading is that you never invest more money than you can afford to lose. This means that you should invest only if you have extra money which you theoretically can lose without ruining your life. Never mortgage your house or get in debt in order to invest in penny stocks.
It is also a smart idea to invest in shares of companies that work in an industry that you understand and that you work or have worked in. This will enable you to analyze the data more precisely and to predict moves on the market.
Another thing that is crucial to your success in trading penny stocks will be the ability to form a strict and firm plan and then to stick with it. For instance, even if you are gaining on a certain trade but it is not performing in the way you expected it to, you should get out of it. Also, do not get tempted by various promises of penny stocks that are not actively traded. Always ensure that the stocks you are trading with are liquid and traded.
If you are interested in learning more about the smart practices in trading penny stocks, we would advise you to check out this infographic that shows you how to do it. It was done by one of the most successful penny stock traders of all time, Timothy Sykes.
To sum it all up, penny stocks are risky, there is no doubt about that. However, there is a lot to be gained from them as well, especially if you employ smart practices and stay informed and smart about it all.
Author: James D. Burbank has years of experience in branding and marketing in Australia, Europe and Asia and he is always excited to share his insights with those who wish to learn more. You can find James on Twitter – @JBurbank2019.