In the United States there are many companies that are in the process of starting up and are not yet well-known companies. When this is the case you can put stock in these companies by purchasing penny stocks.
Penny stocks are defined as low priced stocks, usually around five dollars or less. Penny stocks attraction lies in the potential they have for high percentage returns if the venture succeeds.
The term penny stock has evolved with the market. In the past, penny stocks were stocks that were traded for less than a dollar per share.
It has since been modified to mean any stock that costs less than five dollars. Because of this, penny stocks are still considered to be very inexpensive.
Penny stocks are typically sold to help growing companies with limited cash and resources. If the company does succeed penny stocks reward the stock holder with a high percentage return.
By purchasing penny stocks you help growing companies to expand. As a stockholder you hope that they will one day do really well and grow into a large company with lots of profits.
Investing in penny stocks is often considered to be a risky venture. Traders have the opportunity to dramatically increase their profits, however, penny stocks also provide an equal opportunity to lose trading capital quickly.
Here are some tips to lessen the risk that are often associated with penny stocks:
First, penny stocks are cheap for a reason. Not everyone can go out and invest hundreds or thousands of dollars in the stock market.
Penny stocks allow everyone to be part of the stock market and help out newer companies that have potential to make it big.
Second, understand the role of trading volumes. This plays a big part in the success of your penny stock ventures.
Trading volume is the number of shares, bonds or contracts traded during a given period. Be sure to look for a consistent high volume of shares being traded before purchasing your penny stocks.
Sometimes, looking at the average volume can be misleading. To get in and out at an acceptable rate of return, you need consistent volume. Also, look at the number of trades per day.
Third, do some research on the company you are thinking of buying from. Does the company know how to make a profit? Do you believe in the company? Do you see a successful future?
These are not new questions when it comes to the stock market. Just as you should ask yourself these questions when purchasing stock from more established companies you should do this with penny stocks as well.
As you research, the risks are lower for a potential loss of your capital and increase the odds of a much higher return.
Fourth, make a plan that you can stick to. This will help you feel more secure in your decisions.
Penny stocks are volatile. They will quickly move up, and move down just as quickly.
Remember, if you buy a stock at $ 0.10 and sell it at $ 0.12, that represents a 20% return on your investment. At the same time, a 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis.
If your investment capital is a little higher at $ 10,000, a 20% loss is a $ 2,000 loss. Do this 5 times and you’re out of money. Keep your stops close. If you get stopped out, move on to the next opportunity.
Planning will help you make decisions. For example, if your plan was to sell at $ 0.12 and it jumps to $ 0.13, either take the 30% gain, or better still, place your stop at $ 0.12. This will lock in your profits and leave penny stocks to be less risky.
Five, understand where you are purchasing your penny stocks from. Many find out about penny stocks through a mailing list.
Some of these companies will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling.
Realize that not all companies will do this. Most penny stock companies want to see you succeed and do well.
In order to know if the company is going to treat you right or not, simply subscribe and track the investments. Be observant and notice how the company interacts with their clients.
You will quickly be able to tell if they are a good company or not. With these few simple tips you have the knowledge to easily invest in penny stocks.
Jack R. Landry
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