Penny Stocks are low price and low market capitalization stocks which generally trade outside major exchanges. They are also highly speculative and carry high risk. They have lesser liquidity and larger bid-ask spread. They are usually also traded over the counter through pink sheets. However, you can make humongous amount of money if you invest in the right penny stocks. In this article, I have mentioned 4 tips to make good money at lower risks from penny stocks.
- Monitor trading volume
You will incur huge losses on your investments if the trading volumes are extremely low. While penny stocks do trade at relatively lower volumes compared to mid-caps or large-caps, extremely low volume can make you lose your ability to sell shares quickly if the penny stocks start to tank. There is no way you can get out of it until you hit the bottom.
As per the experts, penny stocks have an average traded volume of 300,000-1,000,000 shares per day. However, it is also important to consider the average spread. The spread is the difference between ask price (listed price of stock) and bid price (actual selling price). If the volume is extremely low then spread is usually high. This means there is resistance in the market for buying at listed price and the stock price needs to be lowered further.
- Be cautious with pink sheets
Against the popular belief, there are many penny stocks which are traded on the 3 big exchanges – NYSE, NASDAQ and AMEX. Since these exchanges are regulated by SEC, the stocks listed on these exchanges are highly scrutinized and there are very less chances of scams. The stocks that trade here have a higher market capitalization and better fundamentals.
Apart from a select few, majority of penny stocks get traded on Over the Counter Bulletin Boards (OTCBB) and Pink sheets, often known as Wild West of the market. OTCBB is actually owned by NASDEQ and has some rules and regulations for listing. However, there are no such requirements for a listing on pink sheets because of which there is high risk of scandals here. So differentiate between OTCBB stocks and Pink Sheet stocks as the latter are more risky.
- Do not follow Free Penny Stock Newsletters
There are lots of free newsletters which offer free stock picks with attractive headlines and claims of making a fortune. These are actually a haven for scammers who deliberately release such letters to entice innocent investors. They may show a one odd good performing penny stock; however, their overall recommendations are negative. Even if you still want to risk by going through these recommendations, follow the first 2 tips mentioned earlier to avoid getting into a trap.
- Go for Premium Stock Picks
Find a trusted person who can send you premium stock tips which are not free. He will charge you a nominal amount, but the returns can easily cover up those expenses.
My final recommendation is avail premium stock tips services, trial it by investing through demo money, apply some of the tips mentioned here and check out the performance. Once you are confident with handling these tips, start investing with real money.
I hope this advice will you give you a goof start on starting your venture into purchasing penny stocks. This is a very risky investment so i advise you to take extreme caution and do as much as research as possible before investing. I have personally made money in penny stocks, but it was very hectic. If you have any advice or tips for others let them know in the comments below!