Penny stocks are those that have a very low value compared to other stocks that are traded in the exchange. They have very low value and very low market capitalization as well. They are also traded in very low volume compared to the other stocks. Due to their low value, many of these stocks are traded in lots of 1000s. Considering that most of these stocks would be less than $1, even a 1000 shares would not cost much to buy and this is one of the main reasons why such stocks are always in demand. The other reason is, of course, the chance of getting high returns within a few days.
While most of the companies underlying such penny stocks are those that have fallen on bad times and are either making large losses or facing bankruptcy, there are also very few companies whose shares have become penny stocks because they are basically very small companies. Their growth might be good and they may also be operating in a sector that has a very good chance of good growth in the future. But their stock price is low due to their small size and they may be in the stock markets to raise funds that would help them to grow bigger. Normally, such small companies look for other sources of funds to fuel their growth but there are some companies which want t raise such funds from the market.
If you want to trade seriously and profitably in penny stocks, then you need to identify such gems. There will not be many such stocks in the market and so it would be difficult to find them. But if you manage to do so, it could be quite a profitable exercise and compared to the normal penny stocks, this could be a pretty safe investment as well.
You also need to make the same fundamental evaluation of the company underlying the penny stock that you would make when investing in normal stocks. See whether the company has good fundamentals, good management team, good assets, less liabilities etc. Also, see whether the company, though very small, is in an industry that has a great growth outlook. Another important point to take care is to look for penny stocks that have a decently good trading volume and those whose volatility is quite less compared to other penny stocks. The reason for this is that good volume will ensure that you can sell off the stock when you want to and less volatility shows that there is good price stability and hence less price manipulation which is always a sign of a good stock.
As with trading any other share, have a specific exit price in mind. You might think that, as the value of the share is so very low, you don’t need to have such basic trading practices in mind when you trade penny stocks. But it has been proved time and again that irrespective of the type of stock that you trade, good trading practices will always help to keep you in the hunt for a long time. So, if you trade properly, you can have the penny stock as a small part of your investment portfolio and can hope to have a profitable exercise with them.
How Do I Get Started?
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