Trading penny stocks is not at all an easy task. It may consist of huge possibilities of losing money. These are the normal stocks of small companies available for trading on the exchange, known as penny stocks. If you trade them in the right manner, they will provide you with good returns in the future. But if you do not pay attention to them, they will also lead you towards significant losses.
So to trade penny stocks, you need to be careful about a few factors suc
h as companies performance, future developing plans, etc. This article will help you to understand What you may require to pay attention to
regarding penny stock investing.
Investing in penny stocks which are micro or nano-cap securities, is only a source you want to try for making a profit. But do not consider it a significant profit generation method. Most professional traders make a profit in the market without adding them to their portfolios.
We are not saying that these are not suitable for trading, but they take time to generate significant profit. So you need to keep patience while trading them. Here we are going to explain penny stocks before going through the process of trading penny stocks.
What are Penny stocks?
Penny stocks are the share of small companies which are available at lower costs to trade. They may also be known as micro-cap stocks, small-cap stocks, and nano-cap stocks.
As per the security & exchange commission rule and regulation, stocks that are traded below $5 are considered penny stocks, but most of the penny stocks are less costly from this price range.
Benefits and Drawback of Penny Stocks
As we mentioned before, penny stocks are generally shares of micro-cap companies. A company that has a small market capitalization will consist of low liquidity, due to which a small number of investors will get attracted towards them.
They are tough to predict, and inventors trade penny stocks less frequently in the market. Trading penny stocks consists of multiple benefits and drawbacks.
Benefits to trade penny stocks
Penny stocks prices fluctuate more frequently by a few cents or some time significantly each day. An increment of 5 cents should not be considered high, But in case the original cost of stock was 5 cents which shows a 200 per cent hike in one day.
Traders who can easily bear huge risks make potential returns through the significant increment in stock value, which is attractive for traders.
The other benefit of penny stocks is if the market capitalization will increase when the company is growing up. If this takes place, a penny stock will be included in large-cap stocks or mid-cap stocks in a short period of a month.
A few instances of penny stocks that touch the sky are Snap Inc. (NYSE: SNAP). Initially, it was trading below $5 in the fourth quarter of 2018. And Within two years, it achieved $50 per share.
Suppose this type of growth appears in the penny stocks, which is a dream of every trader. But according to the professional trader, the reality is they are dreams only.
The drawback of trading penny stocks
The primary reason why the experts do not advise you to invest considerable amounts in penny stocks is that they increase very quickly. They also consist of equal possibilities of losing their value. A huge change appears on a nano-cap investment, sometimes resulting in a dangerous mess.
For instance, a trader who invests a considerable amount of money in 5 cent stocks Whether he/she can generate significant profit or lose their whole amount of money due to the price fluctuation of penny stocks at 5 cents up and down during a few days.
The reason behind this is micro, or small-cap companies are always involved in the startups or initial stage of business. Because of this, they have more chances of failure compared to large and stable companies. Purchasing and holding stocks is not sufficient for trading penny stocks because if companies do not perform well, your investment automatically feeds away.
How to select penny stocks for trading?
As soon as you set the stop and limit at its appropriate place, automatically, penny stocks trading will become an efficient opportunity to make significant profits by investing in growing companies. These companies have the ability to change their small investment into extensive exposure.
Explore a Good Stock Screener
The initial step of trading penny stocks is to pick an efficient stock screener that helps you to sort stocks based on considering multiple factors like share prices, market capitalization, and price-to-earnings ratio, and other several factors.
Some examples of platforms that offer a good stock screener are Yahoo Finance, Google Finance, and TradingView. Must pick penny stocks more attentively while considering several factors because they are highly risky.
Considered For Penny stock Characteristics
Through utilizing a stock screener, apply search filters that help you to decrease your searching for appropriate penny stock trading chances.
The two primary points which you need to consider are the value of penny stocks is less than $5, and a market capitalization should be less than $300million.
You can also consider the price-to-earnings ratio as an essential factor that helps you to pick potential penny stocks. You can pick stocks that hold a P/E ratio less than 1 for identifying stocks whose cost per share is less than earning per share.
This shows that the company’s business is performing well and will attract more traders with their profits, Due to which stock price will automatically increase. Trading penny stocks required a lot of research work to make appropriate choices from a bunch.
Perform a throughout a research
After selecting penny stocks, before buying them, you need to do a little bit of research work about the company to collect a few important information about the company.
This research will help you to determine either they are suitable for making a profit or they have plans to make a profit in the upcoming future.
Traders must also do research about the company’s growth ratio, Whether the company revenue is increasing or not. Another major factor that you need to consider is either the company is going to reduce share prices through a stock split or the company is releasing new shares in the market. If more shares are released in the market, it will decrease the value of each share.
Buy Penny Stocks
After finishing research work and when you are sure about your pick, now it’s an appropriate time to place an order. For placing orders, you may require a trading account. A trader can open trading accounts on their suitable broker’s website. Few leading brokers are ROinvesting.
Traders must be careful while selecting brokers because some brokers provide high leverage that will be added and become a huge amount. Always use stop limit and activation costs while trading penny stocks due to price fluctuation, which take place in penny stocks very quickly. Stop limits ensure that your order won’t move through in case share price increases above at a particular point. Activation price will help you to determine the perfect point at which you can sell your stocks for ignoring losses.