Penny stocks come with low initial investment and have the potential to increase big. According to the Securities and Exchange Commission (SEC), penny stocks are any stock that trades for less than five dollars a share. However, even penny stocks do come with some risks and there are steps you can take to minimize those risks. These tips can help you become a professional penny stock trader.
Consider the Cost and Value of Stock
Initially, you will want to do some market research and analyze charts. Penny stocks are usually evaluated on two types of charts: candlestick and line graphs. Candlestick charts track the open and close price of stocks and the high and low prices. The line graphs generally focus on the opening and closing prices of stock. While one is more detailed, the latter is clearer and often gives a solid impression of the value of the stock. In studying these charts, trends will develop. Noticing any patterns, coupled with the image and reputation of the company behind the stocks, will help you make an educated decision on the cost of the stock versus the potential value each share is worth. Look for companies with solid earning patterns, and have a strong foundation and business strategy.
There are many stock screeners available, many of which are free. Trying out a few different ones and analyzing your results for each will give you a more comprehensive picture of the risk in purchasing any shares. It is advisable to vet out several different sources before deciding. Shares in penny stocks can drop or rise as much as fifty percent in one day, and being aware of trends and liquidity is one way to decrease investment risk.
Because penny stocks are often traded less frequently, they have lower liquidity. Look for a penny stock that has larger numbers being traded daily, and that will be a good indicator of whether or not you will easily find a buyer when needed. Liquidity tools can be found to help you analyze the risk in purchasing shares.
Cut Losses Quickly
When investing, create a plan and try concentrating on one sector. Focus on an area that you already know and do extra research on it. Set a bar on your investment capital so you do not over-spend and set a limit on your exit so you know when to sell with minimum loss.
How Much Can Be Made From Trading Penny Stocks
Image via Flickr by Katherin RidgleyAs with most OTC (over-the-counter) stocks, you generally will not find that one stock that generates instant wealth. However, penny stocks do offer the opportunity to make money if you choose the right stock and are meticulous in your research and choices. The amount of money you can potentially make depends on the amount of time you can dedicate as well as the number of funds you are able and willing to invest. As with any endeavor, there is risk involved but it is possible to become a professional penny stock trader using these tips and your skills, and your experience.