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 a penny stock. 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 stock, you need to be careful about a few factors such 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 stock, 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 stock before going through the process of trading these.
What are Penny stocks?
Penny stock is 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 a penny stock, but most of the penny stock is less costly from this price range.
Benefits and Drawback of Penny Stock
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 stock
Penny stock 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 percent 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 stock 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 stock, 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 stock
The primary reason why the experts do not advise you to invest considerable amounts in penny stock 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 stock because if companies do not perform well, your investment automatically feeds away.
How to select penny stock 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 stock 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 stock 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 stock 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 stock requires a lot of research work to make appropriate choices from a bunch.
Perform a throughout a research
After selecting penny stock, 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 Stock
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 Investby.
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 stock due to price fluctuation, which take place in penny stock 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.
Where to trade Penny stock?
There are a number of stock markets where penny stocks should be traded. Therefore all exchanges provide different stocks on their platform. The most efficient way to ignore the risk of low-cost shares is when efficiently enhancing the number of successful trades by knowing where to trade.
As we mentioned before, penny stocks are those stocks that are traded for less than $5. A wide range of penny stocks are available for trading on major exchanges such as NASDAQ and NYSE.
There is a penny stock reform act of 1990 which amends the Securities Exchange Act of 1934 that defines the penny stock securities. This extended regulatory authority over the people engaged in trading penny stocks in the market.
Other than this there is a Financial Industry regulatory authority that regulates the working of companies issuing the penny stock.
Looking into the corporate and regulatory affairs of the companies. Thus, making the trade secure in financial markets.
The act secures the traders from the penny stock scams by making trading guidelines and providing authorisation to the companies for issuing penny stock.
Some penny stock that will be traded for less than one dollar will also be listed on these prime exchanges. Here we mention some of the exchanges where you find a good range of penny stocks.
The Over-the-Counter Bulletin Board (OTCBB)
NASDAQ is the owner of this platform, and it may consist of listing fees, reporting requirements, and standards. The companies which are traded over it consist of an authority to offer the traders timely financial details.
Traders must note that efficient penny stocks are listed on it due to achieving the status of NYSE and NASDAQ platforms.
The OTC Markets Group (POTCQX, OTCQB, OTC Pink)
They are generally known as the Pink Sheets. These markets are not a safe place for penny stocks due to their low standard for beginning trading, and they do not charge commission. Traders can ignore penny stocks on these platforms and look for investing in low-budget stocks. Investors do not prefer these platforms for trading penny stocks.
Are Penny stocks a good choice for Small budget Traders?
As we all know, trading penny stock consists of various risks. If you are investing in penny stocks to make quick returns with small investments, you are not on the right path. Because the value of penny stocks will take time to grow, they show minor price fluctuations on a daily basis, but they take time to show significant growth.
So before buying penny stocks, check those stocks through various factors. Always go with the best performing penny stocks, which consists of the potential to achieve sustained growth in 1 to 2 years.
Always pick one or two penny stocks for adding them to your portfolio. Never depend entirely on them. Do research work before selecting one or two small-cap stocks and track their activities before buying.
When you purchase those stocks, keep your eye on companies’ activities, whether they have future growth plans or not. Often pick stocks that give you excellent returns in the upcoming years.
If a company really performed well in the market and made its name public. Their penny stocks automatically get started coming in large or mid-cap stocks.
How much can a person invest in trading penny stocks?
Penny stocks trading consists of more risk compared to the mid-cap stocks or blue-chip stocks. So always be careful while investing in penny stocks. Always start with a small amount.
The good thing about penny stocks is they have excellent potential to generate huge growth in the future. You can totally depend on them because they also have huge risks with them. If a company faces loss due to some reasons, you will lose your invested funds.
Traders must note that all penny stocks do not tend to outperform; some hold the potential to provide you excellent returns in future. The best way to pick penny stocks is to track companies’ performance.
List of top penny stocks to buy in 2022
Some penny stocks which are performing well and pass all factors are given here. You can buy any one of these penny stocks mentioned below. There are only the desktop site or a mix of online and desktop that traders can invest in:
- Quantum Blockchain Technologies
- Zephyr Energy
- Premier African Minerals
- PetroNeft Resources
- Comptoir Group
Penny stocks are the best sources for investing in low costs stocks to make profits by long-term investment. Trading Penny stocks is a little bit risky because small-cap companies are involved in this.
They have the potential to provide good returns in 2 to 3 years, but possibilities of failure also come with it. Read about whether penny stocks are suitable for small-budget traders or not. Check here leading brokers who provide penny stocks trading on their website.
Read the above article to collect complete information about penny stocks. Here we also discuss how much you can invest in penny stocks. Check here a list of top-performing penny stocks and collect information at which place they are available for trading. Read the above article to collect complete information about penny stocks trading.