The world of investing has evolved dramatically since the beginning of 21st century. Classical equity market, traditional bond market, volatile derivatives market, rapidly growing cryptocurrency market – these are all an integral part of today’s investment flows across the entire finance industry. At the same time, amid allure of liquid instruments, penny stocks have gained a reputation of affordable product with relatively high percentage returns.
A penny stock (aka microcap, cheap stock) usually stresses a business/company that trades at low prices, often between $1 to 5$ per share (with market cap of up to $300 million). However, in today’s age penny stocks over $5 per share can be also listed on national exchanges. Of course, such stocks could even trade below $1 thereby warming up investors to buy the dips for cents and eventually sell them as soon as the price comes back up to normal.
If you get hooked by the penny stock dream there’s no need to let it off as you are among brothers-in-mind here. We are all looking to invest in microcaps but we want to know we can deal with all kind of challenges along the way. The desire of getting high returns can cloud your decision-making and thus lead to sad consequences.
You must have an adequate knowledge of how to invest in penny stocks, otherwise you will fail without even starting your trading voyage. If you feel OK then continue to below reading that will help you test the waters beforehand.
I know it sounds very straightforward but when familiarizing oneself with penny stocks, you should definitely cling to brokerage platforms and dig into the details. For instance, conduct a research on the customer support, fees structure, instrument availability, transaction means, etc for a broker you have chosen. The pricing structure is a key factor for many novice investors and as you may have guessed, it varies from broker to broker. However, it turns out some of them are cheaper after certain transactions are recorded as per trading period. In other words, the more you trade the less expensive it becomes for you.
Needless to say that fundamental principles of penny stock investing lay within its underlying company. However, for most investors technical analysis remains #1 in trading cheap stocks as it reflects the true nature of the moves. Technical alerts do matter, yes, but we shall not forget about quarter/annual earnings reports to chase up on a performance curve (follow up with Yahoo Finance or Google Finance on that). If a penny stock soars to new highs, there must be a justification of such growth otherwise the risk may absorb the reward, especially for buy-and-hold investors. The 2019 will boost the cannabis industry and associated businesses. Companies like General Cannabis Corp and Cannabis Science Inc. are worth to be included in your watchlist for long-term investments.
How To Find Penny Stocks?
As soon as you have decided that penny stocks is your market, the next step will be to find a place where to trade them. The majority of all microcaps, which is approximately 90% at this stage, trade on the OTC (Over-the-counter) markets (aka Pink Sheets, Over-the-counter-bulletin-board). OTC is a marketplace where counterparties trade between each as per bilateral trade agreement. No clearing houses and trading agents. Just a regular phone and a computer network.
The well-known stocks like Apple and Microsoft trade on formal exchanges, such as NASDAQ, NYSE, LSE. Penny stocks fail to be listed on majors (although you may still find a number of these on national exchanges) due to regulatory requirements. These are bid price, company’s capitalization, disclosure and transparency rules, terms of the contract and many more. For penny stock investing, select the companies with market value of less than $300 million. Both newcomers and sustainable businesses fall under this shortlist.
Also, don’t forget to keep a close eye on the upcoming IPOs (Initial public offering). This might be a great chance to jump in on time and purchase cheap penny stocks before they skyrocket. At the same time, investors seek to get past top-performers at low prices that are now transforming into penny stocks. The ‘comebacks’ entities are being thoroughly investigated as they may now serve as a reliable investment with good rising potential. Make certain you conduct a research before making a bid.
Pick Your Stock
Now after you have done a solid research on everything we have covered so far, it is the right time to find out what penny stocks you have to choose to make money. Are you ready to get started? So, our first stop is of course industry analysis. We have seen plenty of ‘big winners’ across various markets but how do we know what industry to trade? Well, we don’t. Therefore, we hit books/reports/market data to pull off everything we need for an accurate research. We talk penny stocks here so minor news does matter, too. By minor, I mean company’s personnel restructure or dismissals. Now that you are aware of the latest market/online trends 2018/2019, my personal list of penny stock industries 2019 is as follows: pharmaceuticals, cannabis/weed and cryptocurrency/blockchain.
Moving on to stock pricing we have to bear in mind that microcap prices can’t be in the same range with large equities, nor can they trade at extremely low rates. The ‘top movers’ are usually holding #1 places in particular market niches but is not necessarily that all of them are legit businesses with solid financials. Probably you have heard of a term called ‘pump and dump’. It is literally a security fraud when rogue investors start offering an owned penny stock through knowingly false statements followed by massive surge in price (increased demand) and subsequent sell-off at its tops with the aim of locking the gains while making naive traders suffer big losses. Therefore, to avoid this from happening in the future you have to conduct a research again. Yes, it is painful I know but the only way is to study a company to make certain the stock is not fragile and worth the investment.
The mechanics of trading is one of the essentials you have to master before you step into real trades. You will be evolving along the way by examining your own set of rules (strategies) in a pre-caution environment. Big money likes silence so do not rush yourself up on studying both fundamental and technical analysis. Hit the books and study buy/sell orders for the penny stock market. Don’t forget that you are dealing with a highly volatile instrument so ‘limit’ orders might be more useful as compared to buy-at-market ones. In this instance, you have a control over your entry price (and exit price as well once confirmed) which helps you prevent possible loss if it comes to buying stocks at highs and selling at its lows. Keep a close eye on your charts and you will definitely get to know when is the right time to cut off losses (if price plunges down) or bailout in profit (if price goes up).
When trading microcaps you need to understand that these are companies with less than $200 million in market capitalization (around 20, 000 ventures) and are very volatile. Many stocks that trade below $1 have a huge potential for growth but only with an appropriate volume size as per daily basis. The less volume a stock has the more difficult for you to close out your position as NOT many investors are eager to buy it from you (tiny liquidity). This could turn out into a risky deal when a stock is on its downhill move. Stick to medium-size positions going forward and don’t overestimate your skills. That would help you bail out on time and with minimum losses if market overwhelms.