Penny stocks are essentially low priced shares. Some restrict the categorization to a literal threshold to only include stocks whose cost is in pennies only, while the more commonly accepted definition includes stocks whose shares are priced at $5 or below. The name stems from the fact that, compared to the share price of blue-chip stocks, stocks priced at $5 or below are mere pennies to the dollar.
The most enticing quality of penny stocks is the high potential for profit. Penny stocks are usually issued by companies that don’t have large operations, are smaller in size, and have carried out their initial public offering recently. As such, the potential for growth exists and, with it, so does the potential for a significant increase in share price over a short period of time.
Another great advantage is that the lower share price means you can have a larger volume in holding for a small amount of money, especially if compared to some of the giants that are listed on the stock exchange. As of August 2019, Apple’s share price was $208, while Google was at a whopping $1211! For the price of ten Google shares, you could buy 2422 Penny Stock shares (if they cost $5 each).
Based on statistics, that have recorded some penny stocks seeing as much growth as 2400% over a period of two years, your investment of $1211 could grow to almost $29000. You would never see this kind of growth over such a short period of time with a big company like Google or Apple until and unless they come up with some product or service that truly revolutionizes the world overnight.
However, despite the potential for huge profits and the chance to hold a larger volume of shares, one cannot ignore the risk that is associated with penny stocks. These companies have the potential for growth but they are just as likely to collapse due to a variety of reasons such as market competition or lack of funds. One can mitigate such risks but luck does also play a role, especially over long term holding.
Analysis Plays a Huge Role in Profits
One of the ways of mitigating the risk associated with penny stocks is to carry out regular and thorough stock analysis of all the companies in your portfolio. You will need to take a highly focused and technical approach and pay attention to all the fundamentals of the company, including revenue, profits, losses, liabilities, business practices, and marketing strategy.
The importance of analysis stems from what we discussed above. These companies are young and a lot of risk goes with investing in such a company, as one small misstep could cause it to collapse and take your investment down with it. Constant vigilance is what will ensure your investment is protected.
Analysis plays a huge role in the profits you make, especially if you’re looking to make penny stock trading your forte. To build a successful portfolio you will need to be organized with your analysis of different stocks as proper analysis takes valuable time and tiring effort.
Investment Strategies
One of the more common strategies associated with penny stocks is “buy and hold” where you buy a large block of shares and hold them for a long period of time and sell after they’ve made a certain amount of profit. Provided the share price continues to rise, your risk will get lower and lower and the growth of the share price will start to slow down as well.
Another strategy is to short-sell through day trading. There are several shortcomings with this approach though. First and foremost your analysis will have to be a lot more detailed and you’ll have to keep a constant eye on several aspects in real-time to ensure a minimal loss if there is any. You’ll also be taking on a lot more risk than you would be using the “buy and hold” strategy and to really make the risk worthwhile you’ll have to invest a larger amount of money.
You can’t really consider a large scale investment akin to passive investment through an index fund, as no separate index for penny stocks exists. There is also no formal categorization under the law which would identify penny stocks as a specific class of shares. Regardless of the strategy you adopt, you must continue to remember the basics of penny stock trading, which includes in-depth analysis and detailed vigilance.
A Little Knowledge Can Go a Long Way
Regardless of how important the basics are, trading goes beyond them and it helps to keep yourself informed of market trends and increase your theoretical knowledge. With the advent of the internet, access to information has become a lot easier and from the convenience of your handheld device, you can access articles, blogs, forums, and social media communities dedicated to trading where you can follow the market with ease and pick up helpful tips.
One of the best things the internet has to offer is online trading courses. There are even online trading courses that are solely dedicated to penny stock trading. One example is the Timothy Sykes Millionaire Challenge that offers a large video library that deals with a wide range of topics including investment strategies, regulatory compliance, and stock analysis. To learn more about the Timothy Sykes Challenge and the features you would enjoy with your subscription, head on over to https://tradeoptionswithme.com/reviews/trading-course-reviews/tim-sykes-review.
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