Penny stocks, as the name suggests, are the low price shares of the small public companies. You may have heard the other names of the stocks that include micro-cap, nano-cap, or OTC stocks. The main difference of the penny stocks with the common stocks comes in their exchange platforms. In the United States of America, the regular stocks are exchanged in the New York Stock Exchange, the NASDAQ, and some other prominent stock exchanges. On the other hand, the penny stocks find their way on the OTC or over the counter exchange platforms. But the traders have very little information about the companies that are present in the OTCs, which makes it hard to decide on exchange. So, how to make a profit with these penny stocks? We are giving you a head start here. Also, you should give a thought about the famous Timothy Sykes Millionaire Challenge!
Tips to make a profit with Penny stocks
Invest in the low price stocks
You will have penny stocks of the varying price range. But if you are a new player in this field, then you should start small. Let’s give you an example:
Suppose there are two shares that you have been dwelling over to buy. One of the stocks cost $10, and the other one cost $100. If you go with the $10 stock, then you will have less risk of emptying your pockets than it would have been with the $100 stock. So, you can be a bit more relaxed and wait for the stock to bring profit.
Let’s take another example: suppose you have a fixed amount to invest in the market, say $1000. If you spend in the $10 stock, you will get 100 shares. If you invest in the $100 stock, then you will get ten shares. Now, if the price of both the stocks goes up by $2, then you will be making a profit of $200 in case of the $10 stock. On the other hand, the $100 stock will give you only $20.
It looks more pragmatic to consider that the $10 stock will double or triple its value rather than the $100 share. But one fact that may act against you is that there is more chance of the $10 stock going down to $5 than the $100 stock going down to $50. But even then, your loss is guaranteed to be minimized.
Research is essential
We have already mentioned the most significant disadvantage with penny stocks- that there is very little information about the involved companies. It makes the search for the “undervalued” stocks much trickier than it is with the common stocks. It will feel as if you are searching for a needle in the haystack of your backyard.
Also, there are too many traders and brokers in the market nowadays who will be searching for the
same thing as you- a penny stock that will bring fortunes in the future! This is the source of their daily bread and butter. So, obviously, they will do extensive research before delving into the stocks. So if you want to beat them and find the diamond in the trash, then gear yourself and do as much research as you can about the companies. It may include their business sector, their inception, growth, and foothold in the market.
Keep in mind that you may have to search even up to 25-30 companies to get that golden opportunity.
Just do not get frustrated and stray from your course.
Study the trading volume numbers
To understand this point, we will take another example. Suppose you bought ten shares of a $20 stock some time ago. Currently, the price of the stocks has gone up to $30 per share. You have seen that you will have some profit from the stocks, so you tend to sell all the ten shares. But when you go to sell them, there is hardly any buyer!
Another problem of the penny stocks is that they are from lesser-known companies or the companies
that have been walloped in the market. So there will be very less interested people to buy these stocks and risk their money. Honestly, most of the shareholders will be the promoters of the company itself.
The illiquidity in the penny stocks makes it hard to make a profit even when the numbers will suggest so. The problem gets even more daunting when you have a large number of shares. To avoid such situations, make sure that you study the trading volume numbers of the shares that you are willing to buy. Include at least last one or two years in your database. If the trading number of shares is not high enough, then it is better to drop the idea of buying them.
One of the biggest questions that may arise while investing in penny stocks is about the number of shares that one should buy. Also, in how many sectors should an individual invest his money? Honestly, various pundits will give you multiple answers to these questions. Some will say that you should focus on one sector, study it, and invest in 10 to 20 shares. Some others will suggest that you should invest in more than one industry to make an overall profit.
In the case of penny stocks, the risk/ reward factor is very significant. So it is better if you diversify investment field. Even if one of the sectors brings some loss to you, the profit in other sectors will up for that.
Risk should be affordable
You should understand that there is always some risk involved in your investments. Whether investing in regular stocks or penny stocks, there is no guarantee of profit. So you should risk only amount that you can afford to lose. If you are planning on some other important aspects of life, such marriage or schooling of the kids, then you should keep your investment to the minimal. Remember not losing your money and hope is also a profit!
So here they are! Five tips to make the elusive profit from penny stocks. As a final suggestion, study more, make smart investments, and be patient.