Penny stocks are shares that are traded for $5 each or less. Majority of these penny stocks are on the major stock exchanges such as NASDAQ, NYSE, American Stock Exchange, and the Bulletin board. The Bulletin Board is the best to get higher quality penny stocks. However, there are a few smaller ones which trade on the dark markets such as Pink Sheets, OTCQX and OTCQB. Focus on the high-quality companies which trade on the major trading exchanges to avoid losses and refrain from trading in the dark markets. Also, avoid free stock picks that promoters are pushing you to buy as they could be scams. Most of the genuine companies increase in size and price without a promoter. Here are 4 things to do before you trade penny stocks:
1. Do a basic Research
Before investing your cash in a penny stock, do some basic research on the company issuing the stock. You can do a simple Google search. This will give you enough information to help you to determine if the stock is worth a second look. If the research does not yield any results or the information given is very sketchy, then that is a red flag. A valid and reliable company must have a good website with information about the directors or the founders outlined. Carry out a further a research about the company through other sources until you have sufficient information so as to make an informed decision.
2. Start on paper trading
You can start by trading with an imaginary account. The account is risk-free and there is no money required to buy and sell the shares. All that is required is a piece of paper to keep track of trades in real stocks but using the imaginary money. This will help you learn the penny stocks terminologies and lingo and also to make informed choices when you eventually start to use real money to buy real stocks.
3. Choose wisely the types of companies to focus on
It is wise not to just invest in the latest hot industries just because it is getting press review or someone prominent or close to you have invested in it. In most cases when it is getting more reviews from different people, it may be crowded, matured and probably heavily overpriced. The stock may quickly collapse when the bubble burst. However, if you are still confident that it is not just a bubble, then you can invest in it. Buy what you know and what you have confidence in. Check the price volatility of that particular stock. Use tools that will help you to determine the big gainers and losers in the industry. Check the volume and the liquidity of the stock and not just the stocks that are moving.
4. Check the history of the stock
Analyze the past performance of the stock you intend to buy. In some cases, history does not always repeat itself but it’s good to be cautious with stocks that have had poor performance before. Check the stock pattern to see if a stock is worth investing in.
Penny stocks can be extremely risky but they can also be very lucrative. Follow the tips to make enormous profits trading penny stocks.