Understanding Penny Stocks
Companies that trade with quite a low share price are penny stocks. Though the amount of money involved is minimal, the amount of risk and speculation involved in such stocks is exceptionally high.
The primary reasons for this are their lack of liquidity, large bid-ask spreads, small market capitalization and limited following and disclosure. The primary challenge with penny stocks is the lack of liquidity.
How to Invest
1. Don’t invest in a large number of stocks at once
If you want to earn valuable returns to your investment, then the smartest idea for you can be of investing in only a handful of penny stocks. If you go with numbers, there is a considerable amount of possibility that you will end up facing losses.
2. Remember your investments
Another point that one should keep in mind before investing in penny stocks is, you should never make a mistake of forgetting about your expenditure. Moreover, one should never miscomprehend penny stocks as a long-term strategy.
Investors often have a misconception that if they wait for long, the gains earned may be tax-free. It is an inappropriate strategy to implement, as there is a possibility for the stocks to fall by then.
3. Go for stocks with high volumes
As far as the conclusion of penny stocks is concerned, it will somehow be entirely unmanageable for the company to offload the stocks if they if thinly traded initially. If one wants to be on a safer side, it is preferable to buy the stocks that have reasonably high trading volumes so that there is enough liquidity.
Moreover, one should consider a monthly average of returns and not just a day’s trading.
4. Do not fluctuate with the success
While investing in penny stocks, one should always be consistent with the strategy. If you’ve earned a considerable amount of success in your previous investments, you should not think of changing the plan you’ve made earlier.
However, if you end up doing so, there is a large number of possibilities for you to suffer losses. One should never get doomed with overconfidence after success.
5. Keep your purchases at different levels
It is worthy and intelligent to improve the average by selling some shares when the price gets high, instead of strategizing to invest more when the price becomes low. If you commit this blunder, you may tend to lose more money rather than earning.
If you have made this strategy in your mind, then it is better to get prepared for bearing losses in the future.
6. Beware of fake commitments
There are myriad of fraudulent portals available on the internet. These portals may provide you with tons of advice and information on penny stocks, but, you should be smart enough to be adamant.
They might over spice the information to insist you to believe in their strategies. This somehow may lead to disbelief and thereby further investing, but, you should be mindful enough to distrust them.
7. Don’t invest with large amounts
As penny stocks are considered risky for investment, one should not make a mistake of spending huge money at once.
You should be brainy to invest only that much which you can bear to lose. It is a smarter choice to invest a small amount of money at once, as, penny stocks involve a massive amount of risks in them.
8. Avoid scams
One should be vigilant with anything that offers high returns with low costs. Investors should keenly be aware of, promotion through brokers, unofficial promotions, unclear labels and online forums.
These are some common traps which are designed by frauds to exploit the investors.
9. Acknowledging risks
The primary drawback that penny stocks come with, is a vast amount of risks. One should be prepared for losses even.
Also, it is quite safe to invest small amounts and also make a small number of investments at once, so that you don’t bear the losses all at once.
10. Speculative environment
Many brokers strategize their policies by heavily promoting the investors for online account opening, offering them considerable discounts or cash-back.
Nevertheless, online account openings do not involve many securities as far as values are concerned. It is better to get satisfactory and precise detail of everything before beginning.
Conclusion
Penny stocks are just like a game of chess. The smarter you play, the better you are paid. Notwithstanding its name, penny stocks involve real and big business. However, the appeal of penny stocks is quite notable.
Penny stocks are unlike any other usual investment. No matter you are a novice or an expert, you will always find that even the millionaires or people like you prefer investing in the smallest stocks for safer results.
