Most (if not all) types of investment have risks — but they can also yield considerable rewards. This attracts seasoned traders and beginners to invest in bitcoin, bonds, equity, and other products.
Penny stocks are another attractive venture for investors.
They’re inexpensive and bring tremendous upswings but can also be highly risky. Many people have even suffered hefty losses from trading these shares.
If you’re a new petty stock investor bent on pursuing this venture, know the fundamental practices before diving into it.
Here are six beginner tips:
1. Understand the penny stock market.
Begin with a general understanding of the stock market.
Study the essentials, associated risks of investing in smallcap funds, and several factors driving it. These include recent news and events, economic conditions, specific sector performance, and others.
Read easy-to-understand penny stock 101 guides online and learn from reputable experts to glean insights for your strategy.
Gaining a sufficient understanding of penny stocks can help you choose profitable options later.
2. Thoroughly research your options.
Create a comprehensive list of industries and potential stock selections under each category. Enumerate next your criteria for picking penny stocks in line with your investment needs and preferences. Continue filtering your penny stock list with these defined barometers.
Do the following when researching on penny stocks to trade with:
Evaluate options based on the fundamentals.
Dig up essential information about the companies you’re eyeing. This data set can include:
- Profit and loss statements
- Cash flow
- Performance in the previous years
- Buyout potential
- Advisory board
- Company life cycle
- Constant dilution
- Book value per share
- Porter’s Five Forces of Competition, etc.
Prefer also companies with high liquidity, financial transparency, and an overall stable financial position.
Beware of scams.
Steer clear of scams associated with the venture. Common ones include:
- Reverse merger deceptions
- Short-and-distort scams
- Offshore rackets
- Guru scam
- No net sales
- Mining frauds
Critically assess information sources.
Only obtain credible company information from:
- Securities and Exchange Commission (SEC) filings
- Analyst reports published by trustworthy investment firms, brokerages, or independent financial research firms.
Be critical of unsolicited content, such as telemarketing calls and cold emails, including sponsored stock picks and recommendations.
Additionally, do not trust promotional materials that promise quick, massive returns.
3. Practice trading with penny stocks.
Evaluate your level of preparedness in penny stock trading through paper trading.
It involves using simulation or mock accounts, observing the stock market, and trading hypothetical stock lists. You do all these without putting in real money.
Paper trading is the safest way to practice penny stock investing since there’s no risk of financial losses. It also lets you familiarize yourself with handling price fluctuation patterns.
You can keep offline or online records of your paper trading activities and use them to remember valuable investment lessons.
4. Decide on the maximum amount you’re willing to risk.
Determine how much money you can afford to lose. Then limit your investments to that amount.
In this way, you won’t land in financial trouble when your penny stock investment fails (which is common in the industry).
If you’re considering including penny stocks into a risk-limiting diversified portfolio, balance them out with cash or ultra-low-risk investments.
5. Open your investing account with a trustworthy broker.
Seek brokers that comply with SEC regulations and supply you with up-to-date financial information of companies they recommend or you’re investing in.
Ideally, sign up for brokerage firms that don’t charge trading commissions. If you can’t find one, opt for those setting up-front, flat transactions fees instead of on a per-share basis.
You can check online guides sharing the best online stock brokers for beginners as additional references for your search.
6. Leverage investment tools and tactics.
Take advantage of practical investment tools to enhance your trading results. Technical analysis options such as the Relative Strength Index (RSI) are excellent options.
Paper trading can help you apply and identify the most suitable tools to use.
Incorporate also some time-tested investing techniques in your strategy, such as limit orders for buying and selling, and stop orders.
Begin your profitable penny stock trading venture
While penny stocks are attractive, this venture is volatile and risky, so work your way carefully around it.
Be realistic about your expectations, understand how penny stocks fit your investing style, and don’t let emotions dictate your moves.
Over time, you can bag considerable profits and master treading through this venture.