Trading penny stocks is simply a way of trading low-priced shares quickly. It can be a fast way to make money, but can also be a fast way to lose it if you are uncertain of what you’re doing. It’s a risky venture that can pay off in huge returns, but you must have the right strategy in place.
What are Penny Stocks?
Penny stocks are stocks that are trading very low, usually at less than $5 per share. They can also refer to stocks traded on securities exchanges, such as foreign securities exchange. Typically penny stocks are issued by small or newer companies, but that doesn’t mean they don’t have potential value. All multimillion dollar companies such as Ford or Wal-Mart started out with low stock prices. The trick to trading is to find companies on their way up.
Stocks to Avoid
Penny stocks have gotten a bad name because of all the scams and frauds that been associated with them. Because it is such an easy market to get in to, it can pave the way for scam artists to rip people off with empty promises and high fees. Most of these scams are offered as free stock picks. This means the company charges you a fee and picks stocks for you from companies who pay them to promote them.
One of the main reasons people lose money in penny stocks is because they are choosing the wrong ones or trading in the Dark Pool. Dark Pool forums for trading were created to allow companies to remain anonymous, but they tend to trade more risky stocks. It’s best to keep away from these markets and stay with trusted companies who trade on major stock markets like NASDAQ and the NYSE. Do your own research and stick with companies you think have potential.
Getting Started
The first thing you should is test the market by paper trading. In other words, monitor the market closely and pretend to trade on paper. Choose a few companies and invest imaginary money in them. Then keep track of how much you would lose or gain if you had invested real money. Once you’ve done this for a few weeks or months with several different companies, you can probably safely invest actual money and start playing the market.
Choosing Your Stocks
Now that you’ve been paper trading for a while, you probably have a couple of companies in mind that seem to be doing well. The best thing to remember is not to jump on the bandwagon of trading in the hottest new companies. If everyone is talking about them, they are likely on everyone’s radar, so it’s probably crowded and overpriced. And while there is no real guarantee that any company won’t tank, the best course of action is to trade in businesses you know because you will understand if what they are doing makes sense. For example, a dentist could do well investing in stocks with a company who just came out with a new type of excavator. That dentist can do the most thorough research on that company because he knows the business and the tools they need. There are lots of ways to find these companies besides just scanning over the market. Start by looking into the stock prices of companies you purchase from. Did you recently purchase something from a new vendor? Check out their stock prices and do some research to see whether they might be a potential investment opportunity. Start with one company and expand when you feel more confident.
Invest
Finally, it’s time to start trading. The most important thing to do after you’ve invested in a stock is to monitor it closely and set rules for yourself as to when to get out. For example, you might decide to exit if the stock continues to drop for more than three days. Or if it stays stagnant for more than a week. You might also want to try day trading penny stocks. Always continue to watch your trades closely and continue to grow. Penny stocks can be a great investment when done the right way.