Making The Right Penny Stock Picks
Investing in penny stocks is something many people have turned to in order to make some money on the side. Stock trading is now the most viable option to invest some money in for potentially big profits, it’s a path many have undertaken. Be careful of what company you invest in before you make any penny stock picks.
I believe most people know what stocks are. A stock’s price multiplied by the amount of outstanding shares represents the value of the company. A company’s worth can be characterized by total assets minus all its obligations. Stocks may be more or less profitable, according to the company’s efficiency and ability to return to profit for every dollar that was invested in it.
Publicly traded companies are traded on three major exchanges like the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotations (NASDAQ) or American Stock Exchange (AMEX). Even though quite few penny stocks are traded on these exchanges, most of them are traded on the OTC:BB (over the counter bulletin board, also known as the pink sheets.
Potential to make incredible amounts of money in a relatively short period of time, indeed, is one of the most attractive factors that attract investors to penny stocks. Because decreased listings, any change in prices can lead to one hundred times the initial investment. Some people can become rich overnight if they make the right choices.
Moreover, there is also the possibility of losing money. Penny stocks can also go down 50% or more in just one day of trading. Which is why you need to do even more research onto the company before making any investment. Unlike the big stock exchanges, stocks traded on the OTC:BB don’t require to do the same types of quarterly reports as the others. Another issue to be aware of is the fact that most penny stocks don’t have any analysts following the company to really get an idea of what they are up to. Of course you can call the company’s public relation department to get some answers, but then again you have to remember that the person you’re talking to works for the company and may exaggerate the company’s performance. As the old saying goes… Let the buyer beware.
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Consider Buying Penny Stocks
If you’re searching for ways to increase your investment returns you may have considered buying penny stocks. “Penny” stocks are common shares, listed on stock exchanges or the over-the-counter market Pink sheets, that trade for less than a dollar.
There’s a common perception that they are very risky, and there is some truth to this. The risk is not caused by the low price of the penny stocks. Many foreign exchanges typically price even their blue-chips in share prices which are less than a dollar. And because penny shares are not marginable in North American brokerage accounts – which means your broker won’t lend money against their value – they are actually less risky than stocks that trade for higher prices, as the most you can lose with pennies is your initial investment.
But there are some ways in which penny stocks are riskier than stocks that trade for higher prices if you’re not good at understanding the stock market. They tend to be smaller companies, and thus their management is not typically comparable in quality to that larger companies where the remuneration paid to executives can be much higher. Their smaller capitalizations make them more subject to insider manipulation. And they tend to be involved in riskier enterprises such as mining exploration.
In addition to the added risk, there are some other difficulties in trading penny stocks which you should consider. Institutional investors – such as mutual funds and pension funds – avoid them because they are too illiquid to buy in large quantities. This creates a problem for the retail investor as well. If you accumulate a large position in a penny stock you may find it very difficult to reduce your position. There simply may not be enough buyers who wish to buy your stock on any given day. In fact, some penny stocks are so illiquid that they do not trade every day. This illiquidity leads to another problem in trading them: the large bid-ask spreads. The bid-ask spread is the difference between the bid price and the asking price of a share.
In penny stocks it can sometimes be very large, with the difference representing a large percentage of the share’s value. With penny stocks it’s important not to put in market orders unless you’re confident that the spread is small, and that there is sufficient volume trading to fill your order. Otherwise, make it a practice only to use limit orders, and be patient. Volatility is another problem with penny stocks. For this reason you should generally avoid using stop-losses, particularly with very thinly traded issues, as you can easily be stopped out of a position simply by routine trading swings.
Penny stocks are risky, but they can also be rewarding. Returns of 100 percent, 500 percent, or even 1000 percent or more do happen. And since you can only lose a maximum of 100 percent on any single trade, you don’t need to pick a winner every time in order to make a significant return on your investment. Just be sure to limit the portion of your portfolio invested in penny stocks, and then pick a basket of them, rather than putting all of your money into a single name or two. Trading penny stocks can increase your investment returns, provided you trade them with caution, and are fully aware
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